Euro, EUR/USD, Ukraine, ECB, Policy Divergence, Bear Flag – Talking Points
- The Euro has made progress from its March low, but upside looks limited
- Europe may suffer more fallout from war as the US readies more sanctions
- EUR/USD may threaten the 2022 low if prices break below flag support
The Euro is well off its March low versus the US Dollar, but upside movement has stalled, and bulls do not appear anxious to resume buying in the short term. The conflict in Ukraine continues to rage on, and the fight for Mariupol is under close watch. Meanwhile, the United States is reportedly readying another package of Russian sanctions. Those sanctions, while aimed at Russia, have spillover effects on the global economy. Unfortunately for the Euro, Europe is one of the largest recipients of those negative effects.
Bank of France Governor Francois Villeroy, on Tuesday, said the war in Ukraine would drag on growth in the Eurozone. The hit to Europe’s economy will likely only worsen with time unless Ukraine and Russia negotiate a peace, which appears unlikely at the current time. Despite the disarray, European Central Bank (ECB) rate hike bets have firmed up recently, according to overnight index swap pricing.
Still, the ECB faces a highly uncertain outlook amid the conflict, and extremely volatile energy prices are only complicating matters. Meanwhile, the Federal Reserve has grown increasingly hawkish. The Fed is expected to deliver a 50-basis point rate hike at its May meeting, putting the US central bank well ahead of its European counterpart. That bodes poorly for EUR/USD. Given the current perspective, the Euro is likely to remain depressed versus the US Dollar and may even head lower yet. The only tangible reprieve in sight is for peace in Ukraine.
EUR/USD Technical Forecast
EUR/USD is struggling below the falling 20-day Simple Moving Average (SMA). Prices are also trading near the bottom of a Bear Flag pattern, which threatens more losses if support breaks. A breakdown may see the 2022 low at 1.0806 shift into focus, although an intraday move earlier this week found support at the 23.6% Fibonacci retracement level, which could stem losses.
EUR/USD Daily Chart
Chart created with TradingView
— Written by Thomas Westwater, Analyst for DailyFX.com
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