Weekly Overview
24 July 2026

Rising energy prices and intrest rates leave the euro vulnerable 

It does not look like the Strait of Hormuz will be fully reopened for free passage anytime soon. Meanwhile, global oil inventories have declined considerably, which would normally suggest a rapid rise in oil prices. Until recently, however, that increase remained limited, likely because demand for oil has fallen as well.

Last week we noted that this is partly linked to the destruction of refineries in Russia and the Gulf states, but other factors are also at play. The release of national oil reserves and the normal market response to higher prices - more supply and less demand - are likewise having a dampening effect.

Even so, oil prices still seem likely to rise further, now that the Houthis are also joining the fighting. Inventories have already fallen so far that scope for further declines is limited, and replenishment will probably become necessary before long. As confidence in a swift end to the war diminishes, upward pressure on oil prices will increase.

The recent rise in oil prices of approximately 35 percent fits this picture. Combined with the global decline in refining capacity, this has already pushed U.S. gasoline prices back above four dollars per gallon. This trend, too, seems unlikely to reverse soon.

As a result, inflationary pressure is building further, particularly in the United States, where economic growth remains relatively strong. At the same time, the global economy has shifted from a predominantly deflationary to a more inflationary environment. Factors such as import barriers, the relocation of production to safer locations, ageing populations, and tighter labour markets are reinforcing this shift.

Since the U.S. economy is growing faster than the European economy, it stands to reason that the Federal Reserve will ultimately need to tighten policy further than the ECB. In theory, this should support the dollar, but the EUR/USD exchange rate has barely moved for quite some time now. This suggests that other factors are also playing an important role.

It is often pointed out that markets expect broadly similar rate hikes from the ECB and the Fed, and that concerns about U.S. public finances are increasing. While both arguments have merit, we do not currently consider them sufficient to fully explain the dollar's recent behaviour. After all, stronger U.S. growth could lead to greater second-round inflation effects, meaning the Fed will ultimately likely need to go further than the ECB. Furthermore, while U.S. public finances do represent a structural risk, they are not yet an acute problem. For now, higher deficits are actually supporting rates — and, by extension, the dollar — rather than weakening it.

There are, however, other forces at play as well, mostly negative for the dollar. The strength of the U.S. economy has its vulnerable sides. Relatively strong growth is being financed to a significant extent by a budget deficit of around six percent of GDP, whereas a surplus would actually be desirable at this stage of the cycle. An increasing number of investors are questioning whether this is sustainable in the longer term.

Demographic trends are shifting as well. The United States long benefited from relatively favourable population growth driven by immigration, but that engine has largely stalled.

In addition, investment in artificial intelligence is currently taking place on an unprecedented scale. Almost all major technology companies are investing enormous sums to secure their competitive position, often even using borrowed money. It remains uncertain, however, whether these investments will ultimately generate sufficient returns to justify current valuations. Moreover, China is demonstrating that comparable results can sometimes be achieved with considerably less investment, further intensifying international competition.

Political uncertainties are also increasing. Internationally, the United States' limited outcome in the conflict with Iran is raising questions. Domestically, social discontent is growing as well. Recent research shows that while the United States scores highly on financial measures, it lags well behind the best-performing countries on overall quality of life. This is fuelling discontent with current policy in Washington.

At the same time, both domestic and foreign investors are becoming increasingly concerned about the rule of law and democratic institutions. Fears that assets could, under exceptional circumstances, be frozen or even confiscated are undermining confidence. Given the so-called 'twin deficits', the United States is particularly dependent on a continuous inflow of foreign capital. Should that inflow diminish, U.S. interest rates will rise further and/or the dollar will come under downward pressure.

Key Market Forecasts

U.S. Interest Rates

We expect the Fed to raise rates twice over the coming quarters (more if the government eases fiscal policy further). Three-month term SOFR is expected to rise toward 4.15% over the coming months, while the yield on two-year U.S. Treasuries is likely to increase further toward approximately 4.75%.

We expect the 10-year U.S. Treasury yield to trend toward 5.0% or higher over the coming quarters, with any interim declines unlikely to extend much below 3.9%.

USD two-year and five-year interest rate swaps (IRS) are expected to rise toward approximately 4.60% and 4.70%, respectively, over the coming months.
 

European Interest Rates

We expect the ECB to raise rates once or twice more for as long as energy prices do not decline. Three-month EURIBOR is likely to continue fluctuating within a range of 2.25% to 2.8% for the time being.

The yield on 10-year German government bonds is expected to continue rising over the coming quarters toward 4.0% or higher.

Two-year EUR swap rates could rise toward approximately 3.25% over the coming months. Five-year EUR IRS rates are unlikely to rise much further than 3.4%, before beginning to decline toward 3.0% later this year.

We expect the Bank of England to raise rates once more by 25 basis points (due to the weakness of the economy), with the yield on 10-year UK government bonds trending toward 5.5% over the coming quarters.
 

EUR/USD

These factors could allow the euro to remain relatively strong against the dollar for some time yet. However, in the scenario we consider most likely, the U.S. economy continues to grow by around 2.5%, the labour market remains tight, and upward pressure on inflation persists. The market is then expected to start pricing in further Fed rate hikes relative to the ECB after all, especially if oil prices remain high or rise further. In that case, we expect the positive factors for the dollar to outweigh the negative ones, and EUR/USD to fall back before too long into a range of approximately 1.05 to 1.10. Any interim rallies are likely to remain limited to around 1.16. We do, however, expect EUR/USD to climb well above 1.20 over the longer term, as confidence in the US wanes.

This consensus is based on the – end of the quarter - predictions of approximately 50 global financial institutions. Please note that these polls are updated once a month. Last update: July 2026

EUR/GBP

We expect EUR/GBP to find support not far below 0.835 and to trend higher toward 0.87 or above over the coming months to quarters. This is partly because the UK economy continues to struggle, with low productivity growth — which the new government does not appear likely to address significantly — as well as large government budget and current account deficits (the so-called 'twin deficits'). 
 

This consensus is based on the – end of the quarter - predictions of approximately 50 global financial institutions. Please note that these polls are updated once a month. Last update: July 2026

Closing Remark

Should the war in the Middle East continue and push oil prices significantly higher as a result, equity markets would likely fall substantially. This would then put downward pressure on interest rates and upward pressure on the dollar, driven by the resulting economic slowdown. 

Interested in reading more in depth, or on related topics?

• Currencies: the Chinese yuan, Japanese yen and Swiss franc in more detail
• Interest Rates: Eurozone, US, UK and Swiss rates in depth
• Global Financial Markets: a helicopter view of the trends to expect, central bank policy, and how politics may move the markets that affect you

You can find links to the full reports here on the page.