ING says the euro often weakens when oil prices rise, even though risk-off moves in equities can sometimes support it. The note adds that the euro has recently acted as a safe-haven alternative to the dollar.
Using a model based on 12-month rolling betas, the note estimates that another $5 rise in Brent could lead to about a 1% fall in EUR/USD. It also says the link between oil and EUR/USD can get stronger during oil shocks, which raises downside risk.
Oil Impact On Eurusd
The note says EUR/USD is trading about 1% above its short-term fair value estimate. That estimate excludes oil and uses only rates and equities. It argues that, if tensions with Iran escalate sharply, EUR/USD could fall toward 1.160.
On the macro calendar, eurozone PMI releases are due after a weaker ZEW index earlier in the week. The note expects the eurozone composite PMI to remain well above 50.0 (the line between expansion and contraction) and says any effect on the euro may be limited.
We think the euro is in a weak position when oil prices rise. Europe is a major energy importer, so higher oil prices can hurt growth. The latest flare-up in the Strait of Hormuz has pushed Brent above $92 a barrel, creating a direct headwind for the currency. This should keep pressure on EUR/USD in the coming weeks.
Our models, based on 12-month rolling data, suggest that another $5 jump in Brent could mean close to a 1% drop in EUR/USD. This correlation often strengthens during energy shocks, so the risk may be for an even bigger move lower. Options traders should watch for higher implied volatility. Euro put options are one possible way to position for this risk.
Positioning For Further Downside
This matters even more because EUR/USD, now near 1.0750, appears to be above its short-term fair value when measured only by interest rates and equity performance. That suggests markets have been slow to fully price in the geopolitical risk. This creates a clearer case for downside exposure.
In 2025, EUR/USD’s sensitivity to oil became less pronounced. But current tensions are bringing back the traditional negative relationship. Traders who got used to the weaker link last year could be caught off guard.
Recent data also supports a more cautious view on the euro. The flash Eurozone Composite PMI for February was a weak 50.8, showing the economy has little room to absorb an energy price shock. That fragile growth backdrop makes higher oil prices more damaging for the euro.
If the Middle East situation escalates significantly, EUR/USD could break key support levels. A move toward 1.0500 is a realistic risk in that scenario. Traders may want positions that could benefit from a decline over the next month.
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