- The EUR bounced hard after an initial sell-off following the Fed’s rate hike.
- Geopolitical risks weigh heavily on Europe/EUR.
- The European Central Bank will stop pumping money into financial markets.
The EUR bounced hard after an initial sell-off following the Fed’s rate hike. The Fed’s rate hike yesterday led FX traders to buy USD and sell everything else. The euro fell quickly from $1.10 to $1.0950, then abruptly turned and raced higher, reaching $1.1047, its highest level of the day1. Nevertheless, the long-term downtrend in EUR, which began last May and accelerated following Russia’s invasion into Ukraine, remains intact.
Geopolitical risks weigh heavily on Europe/EUR. The war in Ukraine is having a powerful impact on Europe – affecting economic growth, pushing inflation/energy prices higher, disrupting trade and lowering investor confidence in European assets and the euro.
The European Central Bank will stop pumping money into financial markets. Earlier this week, President Christine Lagarde announced that the ECB will discontinue its stimulative bond-buying program in Q3 paving the way for “gradual” hikes in interest rates2. Record high inflation seems to be taking precedent over the unpredictable (and hopefully short-term) consequences of Russia’s invasion into Ukraine.
A closer look at factors influencing the value of the euro:
ECB predicts solid economic growth despite the Ukraine/Russian war. In a speech this week, ECB President Lagarde was optimistic about eurozone growth this year, while acknowledging that the European economy is especially vulnerable to the effect of Putin’s actions on the price of oil, natural gas, and coal.3
USD remains on solid footing. After an unexpectedly strong 2021 and a solid start this year, the US dollar looks nearly invincible. Last week, the dollar index (DXY) reached its highest level since May 2020, as safe-haven demand soared in reaction to the crisis in Ukraine and in anticipation of the first Fed hike in over three years. Having said that, the DXY is currently slightly overbought, and unless the Ukraine crisis deepens, a bout of profit-taking may be in order.
German bund yields reach post-2018 high. Fueled by soaring inflation in Germany and economic growth in Europe, leading to rising expectations for ECB rate hikes later this year, German bund yields moved aggressively higher in the first two weeks of March. Yields increased from negative 0.10%s to positive 0.38%, the highest level since 2018.4 Global bond investors are enjoying positive yields in AAA-rated German bunds for the first time in three years, a tailwind for euro strength.
French presidential election predictions solidify. President Emmanuel Macron appears secure in victory next month, in reaction to the Ukraine invasion, which has united moderate voters behind him. According to Politico, three of Macron’s principal opponents have “heavy baggage as Putin sympathizers.”5
TECHNICALS: On February 10, the EUR/USD reached its highest level of the year at $1.1495. On March 7, it dropped by 6.3% to a low of $1.0806, and has since been trading in a fairly wide $1.09-$1.11 range.6 The long-term downtrend in EUR/USD remains intact and should remain so unless resistance at $1.1550 is broken above.
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1, 4, 6 Bloomberg
2 “President Lagarde presents the latest monetary policy decisions – 10 March 2022.” European Central Bank|Eurosystem, March 10, 2022.
3 “ECB to turn off money taps at Ukraine 'watershed' moment.” Reuters. March 10, 2022.
5 “Putin’s War Is Shaking Up the French Election.” FP. March 10, 2022.