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OCBC strategists Sim Moh Siong and Christopher Wong highlight that despite higher expected ECB rate hikes, the Euro remains under pressure due to oil-driven stagflation eroding real returns in the eurozone. They argue that rising energy prices are worsening the region’s external balance, offsetting the potential support from tighter monetary policy. This dynamic creates a structural challenge for the Euro, as nominal rate increases fail to compensate for declining real purchasing power. For forex traders, the analysis underscores the Euro’s vulnerability against the USD, particularly if the ECB’s policy tightening lags behind the Fed’s. The divergence in central bank trajectories could widen the EUR/USD spread, with technical levels like 1.0600 and 1.0800 becoming critical for short-term positioning. Commodity-linked currencies, including the Canadian and Australian dollars, may also face cross-asset spillovers. Looking ahead, investors should monitor ECB policy adjustments and oil price volatility. The Euro’s real return weakness could persist until energy costs stabilize, while Gulf markets may see indirect effects through trade and investment flows. Traders should watch for policy divergence signals and stagflationary trends in the eurozone.
