Even prior to the Hamas attack, Germany was already suffering from the still elevated natural gas price relative to prepandemic levels. A further rise from here would likely put renewed downward pressure on EUR/USD. Record levels of crude oil production in the US underline the favourable terms of trade shift for the Dollar.

The primary FX downside risk for EUR would be the ECB acknowledging that it discussed its PEPP policy guidance for 2024. That would likely fuel a widening of the BTP/Bund spread and would be made worse if there was explicit criticism of Italy and any hint that the ECB’s TPI is not a tool to be used to protect governments from adopting inappropriate fiscal policies.