The ECB noted that financial markets have so far appeared largely unaffected by the conflict, with stock markets elevated, corporate borrowing costs low, and sovereign bond yield spreads within the 21-nation bloc remaining compressed. "A scenario of notably weaker growth associated with a more persistent energy shock could trigger a reassessment of fiscal sustainability and an abrupt repricing in sovereign bond markets," the report said, warning that such a repricing could spill over into higher corporate borrowing costs and create a negative feedback loop.
The central bank also highlighted risks from hedge funds’ growing exposure to government bonds and from non-bank financial intermediaries with high leverage and light regulation, which could amplify stress across the financial system. Additionally, concerns over US fiscal credibility and the funding of AI-related companies added to the precarious backdrop.
Despite these warnings, the euro strengthened during the day, with the EUR/USD pair rising 0.4% to a session high of 1.0925. Analysts attributed the move primarily to US dollar weakness, as the dollar index (DXY) fell 0.3% amid mounting optimism that the US and Iran are close to a framework agreement in Vienna. A deal would reduce geopolitical risk, potentially increase global oil supply, lower inflation pressures, and benefit the energy-importing eurozone.
However, the contrast between robust equity markets and the ECB’s cautionary tone underscores the disconnect between risk pricing and fundamental vulnerabilities. Traders now eye key EUR/USD levels at 1.0850 support and 1.0950–1.1000 resistance, while awaiting concrete developments from the diplomatic track.
