The European currency is heading for its weakest quarterly result since 2024 amid the conflict in the Middle East and rising energy prices. Over the quarter, the euro lost about 2%, falling to $1.15, and in March alone, it fell 2.5%.

At the end of January, the exchange rate rose above $1.20, reaching a nearly five-year high, but the situation has since reversed. The market is increasingly pricing in the European economy's vulnerability to external energy shocks and worsening growth prospects.

Changing interest rate expectations are adding pressure. The money market is already pricing in three ECB rate hikes this year, although expectations for easing recently prevailed. However, amid a slowing economy and expensive energy, rate hikes are no longer providing the currency with their usual support.

Morgan Stanley strategists do not rule out a short-term decline to $1.13 for the euro. Market participants are also increasing their protection against further weakening of the European currency, especially in pairs with the yen and commodity currencies.