ABN AMRO economists say higher oil and gas prices linked to the Iran conflict would weigh more on Eurozone growth than on US growth. They attribute this to weaker real incomes and confidence in the Eurozone. They add that the Eurozone is more exposed because it is a net energy importer, so it does not gain the same extra activity from higher oil and gas prices as the US. They do not expect a repeat of the last energy crisis, when the economy stagnated for 5 quarters, even in a worse outcome.

Eurozone Inflation Risk In Focus

They state that inflation risks are higher than growth risks, especially if the shock persists. In milder outcomes, they expect inflation to rise briefly, with limited second-round effects. They expect the ECB to ignore a short-lived rise in energy inflation in the more favourable outcome. In a middle outcome, they expect one “insurance” rate rise, likely at the 30 April meeting. In a worse outcome, they expect this to be followed by another two rate rises to guard against spillovers to the labour market. The article notes it was produced with an AI tool and reviewed by an editor. Looking back at the energy shock of 2025, we saw how quickly an unexpected conflict could drive European Central Bank policy. The tensions with Iran at that time pushed Brent crude oil over $110 a barrel, which led the ECB to deliver a surprise “insurance” rate hike in its April 2025 meeting. That event provides a clear playbook for what could happen now.

Market Implications For ECB Policy

The situation today is becoming similar, with recent instability in the Strait of Hormuz pushing oil prices up 15% in the last two months to nearly $98 a barrel. The Eurozone remains a net energy importer, with the latest Eurostat data showing energy still accounts for over 60% of our total import bill. This structure makes our economy far more sensitive to an energy price spike than the United States, which is a net energy exporter. This time, the risk of second-round inflation effects is higher because core inflation has remained sticky at 2.7%, well above the ECB’s target. We should not expect the central bank to simply “look through” this energy shock as it might have in the past. The primary concern will be preventing higher energy costs from spilling over into wage demands and broader service price increases. For derivative traders, this means the market is likely underpricing the odds of a hawkish ECB pivot. Interest rate swaps are pricing in a steady policy rate through the summer, creating an opportunity to bet on a surprise hike. Options on EURIBOR futures that would profit from a rate increase in the second quarter appear cheap given the historical precedent and current inflationary pressures. This outlook also has significant implications for the euro. An unexpected rate hike, or even the possibility of one, would likely cause the euro to strengthen considerably against currencies with more dovish central banks. We should consider long positions in EUR/USD or EUR/JPY, possibly using call options to limit downside risk while capturing the potential for a sharp upward move. Create your live VT Markets account and start trading now.

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