Oil Shock: Central Banks Mistimed

The macro point

In a few sessions, the oil market has flipped. Brent fell below $72 on Friday (WTI below $70), marking its largest weekly decline in a month. The driver? The gradual reopening of the Strait of Hormuz: tanker traffic is accelerating, Gulf exports have climbed back to about 75% of their pre-war level, Saudi Arabia is reloading at Ras Tanura, and the Emirates, Kuwait, and Qatar are reopening the taps. In the background, Iraq demands a higher OPEC quota, a year after the Emirates left the cartel in May. Supply is returning; the price is falling.

And this is where the timing turns cruel. On June 11, the ECB raised its rates for the first time since 2023. On June 17, the Fed maintained its range at 3.50-3.75% but signaled a possible hike, with nine of its eighteen members now counting on tightening. In both cases, the justification largely hinged on the energy surge: Eurozone inflation climbed to 3.2% in May (highest since September 2023), driven by energy at +10.9%; US inflation remained at 4.2%. Both institutions tightened the screws to counter a shock... that is reversing before their eyes.

The most amusing? The ECB's own June projections rely on the idea that inflation will return to 2% by 2028 if oil follows the futures curve, that is, if it falls. It’s falling, and faster than expected. The June hikes, presented as "precautionary," increasingly resemble a move calibrated on a peak already passing. Should we conclude that central banks fought yesterday's battle?

Not so fast. Three objections deserve consideration. First, June's price index (published July 1) covers a month when crude was still high at the beginning of the period: disinflation will appear with delay, not immediately. Second, the ECB didn’t tighten solely because of energy: services remained at 3.0% and core inflation around 2.5%. Cheaper oil doesn’t erase inflation already entrenched in wages and services. Finally, the ceasefire remains fragile: it only took a cargo, the Ever Lovely, being hit off the coast of Oman on June 25, and Donald Trump accusing Iran of drone strikes, for Brent to bounce back 2% in one session. The war premium can return as quickly as it fades.

This oil shock is indeed real and of "supply" origin, removing the main driver of the inflationary fear of 2026. Central banks are not wrong to be cautious, but the market is right to lower the threat of further hikes: this is also why June's dollar rebound is already faltering. In our view, the next chapter of this story is called disinflation, not further tightening, provided that Hormuz remains open. It's likely, but conditional.

Technical point

June's dollar rally (the dollar index had crossed 100) lost momentum at the end of the week. EUR/USD hit a 2026 low around 1.133 mid-week before rebounding to 1.1400: the refuge premium and additional risk fueling the dollar are deflating along with oil. But the euro lacks its own engine. If oil disinflation sets in, the argument for a persistently "hawkish" ECB also fades. Result: a pair stuck in its range, with the next impulse coming from Wednesday's flash inflation.

On the Swiss Franc (EUR/CHF ~ 0.9222). The refuge appeal is fading. As Hormuz reopens and the war premium deflates, the franc loses some of its safe-haven shine. EUR/CHF stays around 0.922: less geopolitical stress, less demand for Francs.

A major energy importer, Japan naturally benefits from cheaper crude. Yet the yen remains defensive, with the Bank of Japan cautious, and EUR/JPY has even slightly progressed. The oil boost has yet to reflect in the rate: it’s a latent support to watch.

The EUR/GBP, meanwhile, has barely moved. The revision of the UK’s first-quarter GDP on Wednesday will set the tone.

The supports and resistances shown below indicate the lows and highs within which the rates are expected to evolve during the week.

Announcements to follow

Busy week. The ECB Forum in Sintra (until July 1) gathers Christine Lagarde and - for his first appearance on the international scene - the new Fed chairman, Kevin Warsh, expected on Wednesday. Their tone on the key issue - does the oil turnaround change the rate equation? - will move the euro and the dollar.

On the data side, two meetings dominate. The Eurozone flash inflation (Wednesday, July 1) will deliver the first verdict on the ability of cheaper energy to cool the price index. And the US employment report, released early Thursday (markets closed Friday for Independence Day), will test the labor market justifying the Fed's "higher, longer" stance. Consensus: about +172,000 job creations.

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