Currency markets are bracing for a period of heightened volatility as analysts weigh three distinct energy supply scenarios stemming from the ongoing Middle East conflict. A new impact assessment by Morgan Stanley says the U.S. Dollar (USD) and the Euro (EUR) remain tethered to the severity of disruptions in the global oil complex.
Upgrade to InvestingPro for a deeper dive into market-moving news The U.S. Dollar Index (DXY), which has benefited from a persistent "safe haven" bid, faces a potential 0.6% retracement should markets return to the stable price and volatility levels seen last month. Under a "near-term resolution" scenario, EUR/USD is projected to climb to approximately 1.18.
A de-escalation of the U.S.-Israel-Iran conflict could likely trigger a sharp rally in Central and Eastern European (CEE) currencies. The Polish Zloty (PLN), Hungarian Forint (HUF), and Czech Koruna (CZK) are tipped to outperform as risk appetite returns.
The “managed escalation” neutral zone Current foreign exchange levels appear broadly consistent with a "managed escalation" framework. In this environment, Brent crude is expected to trade near the $90 per barrel mark, accompanied by a VIX (volatility index) slightly above current readings of 29.49.
The middle-path scenario suggests only marginal USD weakness and modest gains for risk-sensitive currencies. Recent trends would likely persist, but analysts note that the magnitudes involved would be of "limited scope" and unlikely to significantly move the needle for major pairs.
Within the G10 space, the Swedish Krona (SEK) and the Euro would see steady but capped gains, while traditional havens like the Japanese Yen (JPY) and Swiss Franc (CHF) would likely underperform.
Severe disruption and the 1.13 floor A "severe disruption" scenario darkens the outlook significantly as energy supplies would be choked and the greenback would surge. Such an outcome would weigh heavily on European majors, with EUR/USD projected to tumble 2.1% toward the 1.13 handle.
The Swiss Franc is expected to be the primary beneficiary of this flight to quality. Commodity-exporting currencies like the Canadian Dollar (CAD) and Norwegian Krone (NOK) would likely see only marginal gains.
The clearest underperformer within the G10 would be the Swedish Krona (SEK). The Polish Zloty (PLN) and Hungarian Forint (HUF) would lead losses in the CEE region as high energy costs and proximity to geopolitical risk pressure local valuations.
