Brent Retreats, ECB Holds Firm

The macro point

It’s a May that oil operators won’t soon forget. Brent crude returned to around $92 on Friday, down about 19% for the month: its worst monthly performance since the Covid-related drop in March 2020. What explains such a movement? The hope, finally, of a resolution to the Middle East crisis.

The United States and Iran have reportedly reached a preliminary agreement to extend their ceasefire by 60 days and lift restrictions on traffic in the Strait of Hormuz, through which about one-fifth of the world's oil and LNG passes. Tehran would commit to clearing the passage within 30 days. However, caution is advised: Donald Trump has not yet validated the terms, and Vice President JD Vance has dampened enthusiasm by reminding that nothing is signed. At this stage, it is difficult to know if the truce will hold.

This retreat of oil changes the dynamics of inflation. Since the beginning of the conflict in late February, energy has been fueling the price spiral on both sides of the Atlantic. If the barrel stabilizes at a lower level, inflationary pressure should, mechanically, ease in the coming months. Enough to reshuffle the central banks' cards.

Despite this easing, the ECB is indeed expected to raise its rates on June 11. The market is now pricing a 25 basis points increase with about a 90% probability, which would raise the deposit rate from 2.00% to 2.25%: the first tightening since 2023. Why stay the course while the energy shock dissipates? Because inflation has already done its work. Harmonized price increases reached 3.0% in April in the eurozone (2.2% for the core), and May's flash estimates show persistent acceleration in France, Italy, and Spain, even if Germany slows down.

Contrary to what is sometimes suggested, the ECB does not react to yesterday's oil but to today's inflation. The minutes of its April meeting are clear: some governors would have supported an increase already at that time.

Technical point

When the barrel falls by nearly 19% in the month, it’s the currencies that benefited the most from the fear that give back their gains first. The Swiss franc is the clearest illustration of this. The EUR/CHF, which had risen to 0.90 at the height of the conflict, has returned to around 0.9105: the retreat of safe haven flows eases the pressure on the pair. The Swiss National Bank, still at a policy rate of 0.00%, watches without intervening.

The EUR/USD remains glued around 1.1654, close to a six-week low. As long as the Fed maintains its range at 3.50%-3.75% without the slightest hint of easing, the greenback retains a yield advantage that outweighs the risk factor. The technical support to watch is in the 1.1550-1.1600 zone; below, the door would open to 1.1500. Above, the 100-day moving average, around 1.1720, caps rebound attempts.

On the British side, the EUR/GBP is parked around 0.8650. On the Canadian side, the EUR/CAD stands at about 1.5980, the Canadian dollar is sensitive to oil, and a sustainably low barrel would penalize it, which could support the pair. As for the EUR/JPY, around 185.5, it remains suspended on the intentions of the Bank of Japan: its governor speaks this week, and any signal on the continuation of normalization could awaken a yen currently trailing.

The supports and resistances displayed below indicate respectively the low and high points within which the rates should evolve during the week.

Announcements to follow

A busy week, focused on "activity + employment", and especially the final sprint before the decisive ECB meeting on June 11. The calendar opens Monday with the US ISM manufacturing index, a barometer of industrial health that has been hovering around the 50 threshold for several months, the boundary between expansion and contraction. Tuesday, the eurozone's flash inflation is up: it’s the most watched data of the week. Any confirmation of inflation near or above 3.0% would almost seal the scenario of a hike on June 11.

The highlight of the week remains the US employment report (NFP), released Friday. In a context where the labor market is starting to show signs of slowing, a weak number would reignite the debate on a possible Fed easing in the second half and weigh on the dollar. Conversely, a solid number would keep the euro under pressure. Also note the speeches by former Fed Chair Jerome Powell on Monday and the BoJ Governor on Wednesday.

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