01.03.202223:55 Forex-elemzések és áttekintések: EUR/USD: Euro remains in the firing line

News coming from the geopolitical front continues to shake global markets.

Concern for the fate of the global economy is one of the main reasons for the continued demand for a protective dollar and a sell-off in stocks.

After a long meeting on Monday, the delegations of Russia and Ukraine agreed to meet again for a second round of talks, reviving hopes for a diplomatic solution to the crisis.

However, this was only enough for the S&P 500 to win back most of the decline observed during yesterday's session. Following the results of trading, the index sank by 0.24% to 4,373.94 points.

The day before, the greenback jumped to a local high at 97.40 points before correcting to 96.70 points.

In addition to increasing tensions in Eastern Europe, the prospect of an early tightening of monetary policy in the United States remains another factor in strengthening the dollar.

Investors continue to sell stocks, preparing for an imminent rate hike from the Federal Reserve.

"The greenback is considered a safe haven currency that tends to rally during periods of heightened geopolitical uncertainty or risk-free sentiment in financial markets. We believe that market expectations of six or seven interest rate hikes in the US this year are likely to support the USD in the coming months. Currently, we consider the dollar as an attractive tactical currency position," UBS analysts noted.

Military actions in eastern Europe are not likely to force FOMC officials to abandon the rate hike, since inflation has reached a 40-year peak, but they may slow down the tightening cycle.

The crisis in Ukraine has led to the fact that the probability of raising the federal funds rate by 50 basis points in March decreased to 11.4%, whereas a week ago it was estimated at 41%.

Atlanta Fed President Rafael Bostic said on Monday that he does not rule out a half-point rate hike, although he supports a quarter-point rate increase.

However, the last word remains with Fed Chairman Jerome Powell, who will speak this week with a report on monetary policy in the US Congress.

The main question now is what Powell will say about the economic consequences of the Russian-Ukrainian conflict.

If Powell will focus on high prices and the need to get ahead of their growth, the dollar will strengthen, since this scenario will require the planned pace of tightening of the monetary policy. However, if he expresses any significant concern about economic shocks and says that we should not expect an aggressive normalization of policy from the central bank, this will negatively affect the USD exchange rate.

Most likely, the head of the Fed will confirm the need to raise the rate, but also inform that it is too early to talk about the economic consequences of the Russian-Ukrainian crisis.

The greenback resumed growth against its main competitors on Tuesday, including the euro. The USD index recovered above the 97.00 barrier, leaving no attempts to move higher. If dollar bulls succeed in developing success, their next target will be the 2022 high at 97.73 (from February 24) on the way to the round level of 98.00.

Investors continue to refrain from acquiring risky assets in light of the continuing tension between Russia and Ukraine.

The main US stock indexes are declining on the first day of spring on the preservation of foreign policy risks, losing about 1% on average.

Faint hopes that yesterday's talks between the parties could lead to a ceasefire were not justified, because they did not lead to a breakthrough, and the negotiators did not say when a new round would take place.

"The news coming from Ukraine remains gloomy. The fighting continues while the West seeks to step up efforts to isolate Russia," National Australia Bank strategists said.

Instability will support bets on defensive assets, including the dollar, and the euro will be under pressure, they believe.

Over the weekend, Western countries took measures to disconnect a number of Russian banks from the SWIFT system and imposed restrictive measures against the Russian central bank.

Disconnecting Russian banks from SWIFT puts other banks and companies around the world at risk, Barron's edition reports. In particular, delays in payments from Russia can lead to a reduction in liquidity for many firms.

Market participants fear that unprecedented Western economic sanctions against Russia could harm global growth, as well as provoke even more severe disruptions in the supply of raw materials and goods than caused by a surge in the incidence of the Delta coronavirus strain. This, in turn, will lead to increased price pressure around the world.

In such a scenario, inflation in the United States risks updating the high in more than 50 years and exceeding 9%.

It is worth noting that the price pressure in the US economy continues to increase. According to data released on Friday, the core index of personal consumption expenditures in the United States rose from 4.9% to 5.2%, which is the highest since 1982.

The situation in the labor market is also pushing the Fed to take more decisive action: strong demand for labor leads to an increase in wages, which also fuels further price hikes.

Economists expect that Friday's report on employment in the US non-agricultural sector for February will show that the unemployment rate in the country will fall to 3.9%, and average hourly earnings will grow by 5.8% year-on-year.

Pine Bridge Investments analysts believe that a military conflict in eastern Europe could lead to an acceleration of inflation in the United States due to the likelihood of restrictions on Russian oil and gas exports. In their opinion, the Fed will not change its plans for monetary policy because of this.

Experts also believe that the war will deter the ECB from taking any decisive steps towards tightening in the near future.

Deutsche Bank estimates that an increase in oil prices could lead to an increase in inflation in Europe to 5.7% this year, which is a full percentage point higher than the non-conflict scenario. But a corresponding blow to GDP will put the European Central Bank in a difficult position.

On Monday, ECB spokesman Fabio Panetta said it would be unwise to make decisions in advance about future policy steps in the face of increasing uncertainty over the war between Russia and Ukraine.

"Faced with such uncertainty, there are reasons for the central bank to accompany the recovery without excessive intervention. The ECB should take moderate and cautious steps in adjusting policy so as not to stifle the still incomplete recovery," he said.

Russia's military special operation in Ukraine threatens the collapse of the European gas market, which is already experiencing the worst energy crisis in history, analysts at Wood Mackenzie say.

According to the company's estimates, the supply of pipeline gas from Russia alone accounts for 38% of EU demand, which makes sanctions against energy supplies from Russia impossible. If the EU refuses to supply Russian gas, the long-term consequences for the whole of Europe will be very detrimental, experts warn.

"Europe has agreed to block the access of certain Russian banks to SWIFT. There are strong fears in the eurozone that this could interfere with Russia's payments for energy supplies, which could then be stopped. Such a move will lead to a sharp increase in the growth risks facing Europe, which we expect will be accompanied by a potentially aggressive depreciation of the euro," Rabobank economists said.

"Assuming that there will be no interruptions in energy supplies from Russia to Europe, the EUR/USD pair is likely to stay above the February 24 low at 1.1105 and may return to 1.1300 if Western governments give sufficient assurances regarding energy supplies to Europe," they added.

The main currency pair sank to 1.1125 on Monday, after which it rebounded, but encountered resistance in the area of 1.1240 and ended trading near 1.1215.

On Tuesday, it turned down, failing to stay above 1.1200.

Investors are being cautious and are monitoring the development of the conflict between Russia and Ukraine. Against this background, the euro is having difficulty finding demand.

The Markit Economics data on business activity in the manufacturing sector of the eurozone, which were revised downward, also do not contribute to this.

The purchasing managers' index in the field of industrial production of the currency bloc, according to the final assessment, sank to 58.2 points in February.

Analysts predicted that the indicator would remain at the level of the preliminary estimate of 58.4 points.

The EUR/USD pair failed to move significantly beyond 1.1200 and is now trading under this mark. Since it is too early to expect a resolution of the situation around Ukraine, the pair may sink to the level of 1,1000, according to Scotiabank.

"The EUR/USD pair has managed to stay above 1.1100 since early–mid-February, despite the bearish price trends. The quotes only briefly fell below the 1.1150 area, which acts as a support covering 1.1120-1.1100. Resistance above 1.1200 is at 1.1240–1.1250, 1.1275 and around 1.1300," the bank's strategists said.

"At the moment, EUR/USD is unlikely to move higher. The pair may continue to decline to 1.1000 as the Russian-Ukrainian conflict drags on and may escalate in the next few days," they added.