OCBC’s Sim Moh Siong and Christopher Wong observe that while the European Central Bank (ECB) left rates unchanged in July and is expected to deliver at least one more 25 bp hike to 2.50% in September, rising energy prices still tilt terms-of-trade in favor of the US Dollar (USD) over the Euro (EUR). Europe’s status as a net energy importer versus the US as an exporter leaves the Euro more vulnerable to sustained Oil strength.

Energy terms-of-trade still favor Dollar

"Meanwhile, the ECB kept rates unchanged in July as expected and did not push back against market pricing for a 25bp hike in September."

"We continue to expect a final 25bp increase to 2.50% in September, although the risks are tilted towards an additional hike."

"Even with the ECB maintaining a hawkish bias amid rising energy prices, relative terms-of-trade dynamics favour the USD over the EUR."

"Europe remains a net energy importer, while the US is a net energy exporter, making the euro more vulnerable to sustained increases in oil prices."

"Energy-linked currencies such as NOK have outperformed, while net energy importers including NZD and SEK have lagged."

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