Euro, EUR/USD, ECB, Inflation, Russia-Ukraine – Talking Points
- Euro bounces as Blinken and Lavrov are set to meet next week
- ECB rate hike bets help Euro, but geopolitical tensions weigh
- EUR/USD bulls may target 100-day SMA as trendline holds
The Euro is slightly higher against the US Dollar this morning as geopolitical tensions cooled before reaching a fever pitch yesterday. Secretary of State Anthony Blinken is set to meet Russia’s Foreign Minister Sergei Lavrov next week, according to the State Department. Market participants cheered the news. The Euro’s response was strongest against the safe-haven Japanese Yen and weakest against the risk-sensitive New Zealand Dollar.
Russia began massing troops along the Ukrainian border in November, preventing the Euro’s appeal to investors who are wary of what would be the largest military conflict in the continent since World War 2. Volatility in EUR/USD rose to the highest level seen since 2020 earlier this month, following a multi-month drop against the Greenback as US rate hike bets surged against the then dovish European Central Bank (ECB).
That dovish narrative has been upended by record-high inflation. Consumer prices rose a record 5.1% y/y in January, defying relatively modest estimates. ECB rate hike bets have surged since then, with overnight index swaps (OIS) pricing in 20 basis points of tightening by September. That would be the first rate increase for Europe since 2011. ECB members, including Chief Economist Philip Lane, have since signaled that inflation is likely to be more persistent than previously thought.
The ECB is expected to move its inflation forecast up at next month’s meeting. Normally, such a shift in tone and market-based rate expectations would provide a significant tailwind to a currency’s exchange rate. Indeed, EUR/USD is on track to record its best monthly gain since May 2021, with prices over 1% higher this month, but it remains well of its highs from last year.
The Euro faces an uphill battle as long as a geopolitical conflict looms just outside its borders. A package of economic sanctions on Russia would only supercharge inflation in Europe, but the economic costs to growth would also be temper growth expectations, likely culling rate hike bets. A complete withdrawal of Russian troops would present the best-case scenario for EUR/USD. If Blinken and Sergei manage to make headway on the diplomatic front, the Euro may take off.
EUR/USD Technical Forecast
EUR/USD has reestablished itself above a trendline from November, with the 50-day Simple Moving Average (SMA) likely providing confluent support. Bulls may stage a run on the 100-day SMA, which sits slightly below the 23.6% Fibonacci retracement level. A break higher would bring the 2022 high into focus. Alternatively, if prices fall back below the trendline, an immediate test of the 50-day SMA is on the table.
EUR/USD daily chart
Chart created with TradingView
— Written by Thomas Westwater, Analyst for DailyFX.com
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