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Euro: War resolution supports upside – Commerzbank

Source Fxstreet

Commerzbank’s Antje Praefcke expects the European Central Bank (ECB) to raise rates in June, largely as a symbolic move, with markets already pricing this in. She argues that an eventual end to the Iran conflict would likely weaken the US Dollar (USD), ease Eurozone growth concerns and leave ECB expectations broadly intact, allowing the Euro to benefit without major corrective repricing.

ECB hike and Iran resolution implications

"The market has also almost fully priced in a rate hike in June, so it should come as no surprise. Hopes for a solution have recently already dampened expectations of further rate hikes by the ECB later this year."

"Whether or not we will actually see a solution to the Iran conflict in the near future, one thing seems certain: the ECB will raise its key interest rate in June. Even if hopes for the Strait of Hormuz to reopen in the coming days are realized, the ECB is likely to raise rates."

"For as long as the situation in the Middle East does not escalate again and/or the first signs of second-round effects are not visible, the ECB is likely to leave it at this single action. We have emphasized often enough that 25 basis points more or less are not decisive, but rather the credibility of a central bank’s reaction function."

"This also means there is less potential for a correction in the euro if expectations are priced out a bit more over the longer term. In the short term, the euro could therefore benefit from an end to the war in Iran: the dollar is likely to fall, economic concerns for the euro zone are likely to ease, and interest rate expectations are unlikely to provide much cause for corrective movements (toward a weaker euro)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

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