Barclays said on Friday that the euro faces the risk of further depreciation versus the U.S. dollar if unrest in the Strait of Hormuz persists, pointing to a growing divergence in economic momentum between the United States and Europe.
The bank noted that U.S. economic surprises remain solidly positive while data from Europe has continued to disappoint, reinforcing a widening gap in activity. Barclays said both regions share similar worries about inflationary pressures stemming from war and about fiscal paths. However, it emphasized that in the United States stronger underlying activity is lifting yields for fundamentally different and healthier reasons than is the case in Europe.
In Europe, Barclays said growth dynamics are softening. That deterioration has not yet forced Bund yields lower because inflation fears remain prominent. The bank warned that if eurozone growth continues to slow, bond markets may become more concerned that the European Central Bank could make a policy error and raise rates for the wrong reasons. Such concerns could lead to a flattening of the eurozone yield curve, Barclays said.
Barclays' foreign exchange team, in a May 17 note, added that positioning in the dollar has moderated, which leaves room for the greenback to move higher. It argued that underlying fundamentals - particularly the divergence between growth and interest-rate dynamics in the U.S. and Europe - still support strength in hard currencies. The firm saw scope for further dollar appreciation should tensions in the Strait of Hormuz remain unresolved.
On equities, Barclays said a weaker euro would tend to sustain the early relative outperformance of exporters versus domestically focused sectors across European markets. By contrast, if the conflict were resolved, the recent drop in the euro against the dollar could reverse and investor demand for European domestic cyclical stocks could re-emerge, the bank added.
Taken together, the bank's analysis links geopolitical risk, regional growth differentials and monetary policy concerns as key drivers of near-term currency and bond-market behavior, and highlights potential spillovers into sector performance within European equities.
Context and implications
Barclays' commentary frames three interacting forces: an observable divergence in economic surprises between the U.S. and Europe; persistent inflation concerns that are keeping European bond yields from falling despite slower growth; and market positioning that could amplify moves in the dollar. The bank identified possible outcomes in both fixed income and equity markets depending on the evolution of growth and geopolitical tensions.