Euro: crime and punishment. Forecast as of 05.04.2022

Another exacerbation of geopolitical risks has set the EURUSD bulls back. War crimes in Ukraine and new sanctions against Russia create barriers to the euro growth. Let us discuss the Forex outlook and make up a trading plan.

Weekly euro fundamental forecast

The euro withstood the strong US jobs report but was pressed down by the rising geopolitical risks. The topic of war crimes and a new package of economic sanctions as retaliation, on the one hand, pushed up the demand for safe havens and, on the other hand, increased concerns about a downturn in the euro-area GDP. The EU’s dependence on Russian oil and gas makes sanctions a double-edged sword. The more of them, the worse for the European economy. As a result, EURUSD bulls were set back.

Investors want to ignore geopolitics, but they can’t. A new reason to buy safe havens was the information about war crimes in Ukraine. The US dollar soared while the euro was down even despite the rise in the US stock indexes. The EURUSD bulls were not encouraged by the euro-area inflation rate increase to 7.5% or the hawkish comments of the ECB policymakers. For example, Isabel Schnabel announced that despite the events in Eastern Europe, the central bank’s course towards the normalization of monetary policy is correct.

Dynamics of euro-area inflation

Source: Bloomberg

Despite the huge gap between the expected rate hikes by Fed and ECB and, accordingly, the spread between US and German bond yields, the US central bank will hardly act more aggressively than anticipated. The 50-basis-point increase in borrowing costs at the FOMC meeting in May is already priced into dollar pairs. But for geopolitics, the EURUSD bulls would have consolidated the price above 1.1.

Dynamics of EURUSD and US-Germany yield gap

Source: Bloomberg

Remarkably, the US government increases uncertainty, supporting the greenback strengthening. The US Treasury has suspended payments of dollar debt from the accounts of the Russian government in US banks. The move is forcing Moscow to seek alternative debt repayment sources, including draining foreign currency reserves, spending new revenue, or defaulting. In the latter case, the demand for safe-haven assets will increase even more.

In my opinion, the news about war crimes in Ukraine is like a flash that should quickly pass away. Russia is waiting for new sanctions, but then the attention of investors will return to the topic of divergence in monetary policy. And there, the positions of the euro do not look so hopeless, given the positive already priced in the US dollar quotes. Based on the risk reversals, the difference in premiums on call and put options, the single European currency can still recover. The situation is not as critical as, for example, in late February – early March.

Dynamics of euro risk reversals

Source: Bloomberg

Weekly EURUSD trading plan

The geopolitical risks escalation is temporary. Furthermore, the US-Germany yield gap could well be narrowing. Therefore, the EURUSD could still consolidate in the range of 1.089 – 1.116. If the price rebounds up from the supports at 1.092 and 1.089, one could consider entering purchases. If the pair goes down below 1.084, it could continue falling.

Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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