FED and ECB under Oil Pressure

The macro point

The specter of stagflation looms over the eurozone. The figures are unequivocal. The eurozone composite PMI dropped to 48.6 in April, below the 50 threshold that separates expansion from contraction, for the first time since December 2024. Even more worrying, the services sector—which accounts for about 70% of European GDP—shows an index of 47.4, a 62-month low. How to explain this? Due to the energy shock linked to the Middle East conflict, which is now spreading to the entire real economy.

The apparent paradox comes from the manufacturing sector, whose PMI rises to 52.2. But beware of the optical illusion: this increase primarily reflects defensive stocking by companies anticipating further shortages and additional price increases. Supplier delivery times have lengthened to their highest level since July 2022. No need to be a wizard to know that this manufacturing rebound is a mirage.

Macroeconomically, Germany is particularly affected. The Ministry of Economy has halved its growth forecasts for 2026, explicitly citing the energy shock linked to the Iranian conflict. The IMF has also revised its projections downward for the eurozone, now at 1.1% growth in 2026, compared to 1.3% in January. The eurozone has experienced the largest negative revision among advanced economies.

Meanwhile, inflation is rising again. The harmonized consumer price index stood at 2.6% in March, and the ECB anticipates a peak at 3.1% in the second quarter. Company selling prices are increasing at their fastest rate in 37 months. According to us, this is the worst-case scenario for the ECB: an economy slowing sharply while prices accelerate. It's hard to know if Frankfurt will dare to move next week.

The ECB should maintain the status quo at its April 30 meeting. The market anticipates rates to remain at 2.00%, followed by a first hike in June. The majority of traders expect the key rate to reach at least 2.50% by the end of the year. This would be a 180-degree shift from the cycle of cuts started in 2024, but the energy shock leaves little choice.

In the United States, the Fed faces the same dilemma but in a more comfortable position. Rates are at 3.50-3.75%, and the question is no longer whether the Fed will cut its rates, but if it still can, given the oil shock. The FOMC meeting on April 28-29 will be closely watched.

Technical point

EUR/USD: tight range between 1.16 and 1.18. The flagship pair of the foreign exchange market has been moving in a narrow corridor since early April. The euro weakened to around 1.1678, a two-week low, before stabilizing around 1.1760. The dollar benefits from its status as a safe haven in the face of geopolitical tensions and its yield advantage (3.50-3.75% versus 2.00% for the ECB). However, the uncertainty regarding US policy in the Middle East limits the greenback's gains. In the short term, direction will largely depend on the tone of the Fed and ECB next week.

EUR/GBP: the pound holds firm. The pair fluctuates around 0.8710. The UK stands out with a composite PMI of 52.0 in April, well above expectations (49.8) and especially in expansion territory, unlike the eurozone. This divergence in economic dynamics positions the Bank of England as the only major European central bank able to maintain its rates without risking recession. The sterling should continue to stand out against the euro.

EUR/CHF: the Swiss franc remains strong. The pair is around 0.9175, close to its lows of the year. The Swiss franc fully plays its role as a safe haven in a high geopolitical risk environment. The SNB, whose key rate is at 0.00%, has limited room for maneuver. We believe the CHF will remain supported as long as the Middle East conflict is unresolved.

EUR/CAD: oil supports the loonie. The pair fell towards 1.60, benefiting the Canadian dollar from the surge in oil related to the Iranian conflict. Canada, as a net oil exporter, mechanically profits from Brent's rise above 100 dollars. However, the Bank of Canada (rate at 2.25%) faces similar pressures to the ECB: inflation revived by energy in a fragile growth context.

EUR/JPY: the yen under pressure despite the BoJ. The pair is around 186.70. Japan shows a manufacturing PMI of 54.9, one of the strongest globally, and the market is now anticipating a rate hike by the BoJ in June or July. Yet the yen remains weak against the euro, penalized by an always unfavorable rate differential despite the BoJ's gradual tightening. The influx of foreign investors into Japanese equities (+2,381 billion yen this week) reflects renewed interest in Japan.

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

Announcements to follow

The week of April 27 will be one of the busiest of the year in terms of macroeconomic events. Two major central bank meetings—the Fed (April 28-29) and the ECB (April 29-30)—dominate the calendar. At the same time, the first GDP Q1 estimates for the eurozone and the United States will be published, as well as the flash inflation in April for the eurozone. Can we expect surprises? It’s likely, as the oil shock has changed the game.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not in any case serve as a basis or be considered as an incentive to engage in any investment.