It is clearly hard to say how close the two sides are to a deal. The US has put up a 28-point plan, and the EU, in conjunction with Ukraine, has responded by seeking amendments to many of these proposals. The mood music seems good right now, but we’ve been in similar situations before, and the outcome has been disappointing. Are the financial markets prepared for a peace deal?

That’s clearly hard to say. Polymarket has pricing for a ceasefire between Russia and Ukraine in 2026 at around 50:50 right now. This suggests that a peace deal is not priced into financial assets, and hence the consequences could be significant. After all, the euro/dollar tumbled by as much as 15% in the six months following Russia’s attack on Ukraine in February 2022. This being said, many analysts cannot expect the euro to rally by 15% against the dollar in the next six months if a peace deal is agreed now. Why not?

Steven Barrow, Head of Standard Bank G10 Strategy, said there would be two main reasons. The first is that Russia’s attack was a shock, and the second is that the economic ramifications for Europe of a peace deal are nowhere near as big as they were when the war broke out. If we take the first of these, we think it fair to say that few thought Russia would attack Ukraine in February 2022 even though it had amassed over 100k troops on the border.

Hence, a significant part of the euro’s subsequent decline was due to this shock factor. Fast forward to today, and peace deals have been talked up on a regular basis, particularly since President Trump entered the White House. Some might even suggest that both sides had already fought themselves to a (near) standstill, meaning that some sort of peace deal was becoming more likely even without the US’s helping hand. A peace deal now would still be a surprise and lead to euro strength, just not on anything like the scale of the shock and the fall in the euro that we saw in 2022.

The second point, which is more important, is that the economic implications of a peace deal for Europe are vastly inferior to the connotations of the war when it broke out in 2022. This is because Europe at the time was hugely dependent on Russian energy, particularly gas, and especially for certain countries. Russia’s invasion led to a surge in energy prices. It represented a hugely adverse terms of trade shock for Europe, and these sorts of shocks almost inevitably create currency weakness, as we saw with the euro. In contrast, the US’s relative energy self-sufficiency arguably left it as a net beneficiary of the conflict in Ukraine.

In short, euro/dollar faced a double whammy from the energy price implications of Russia’s invasion and sunk as a result. In subsequent years, the EU has reduced its reliance on Russian energy. In terms of gas, the EU now imports less than 20% of its gas from Russia compared to around 45% when Russia invaded Ukraine, and there are plans to cut this to zero by the end of 2027. The point is that the beneficial energy implications of a peace deal now are likely to be a small fraction of the hit Europe took back in 2022. Again, this is not to suggest that the euro should be unmoved by a peace deal, but any thoughts of a six-month 15% rally would seem far wide of the mark.

While we believe that these are the two key aspects to consider when judging how the euro might respond to any peace deal, there are undoubtedly other factors to consider. The reconstruction of Ukraine, or that part of Ukraine that remains Ukrainian, could aid European growth, especially as it will likely be paid for by Russian reparations or the EU’s use of the EUR210bn of frozen Russian assets it holds.

In other words, there will be numerous benefits for the EU and the euro, although there will also be benefits for the US as well, such as rare-earth agreements. In sum, could a peace deal give euro back the 15% it lost against the dollar in 2022? In Steven Barrow’s view, it is probable. All else equal, he suspects that the subsequent six months would see a rise of no more than a quarter of the 2022 effect.