Financial markets’ euphoria about the possible compromise between the parties to the conflict in Ukraine showed the common desire for peace. However, events in Eastern Europe are not the only reason for the EURUSD rise. Let us discuss the Forex outlook and make up a trading plan.
Weekly euro fundamental forecast
The EURUSD has performed the best rise over the past six years, oil and gold prices have been down, and the European stock indexes have featured the best performance since the beginning of the pandemic. One could assume that the conflict in Ukraine would end overnight. Unfortunately, this is not so. The fact that Kyiv is willing to negotiate questions of neutrality in exchange for its security does not mean a ceasefire. Russia also has other demands that Ukraine doesn’t want to meet. Therefore, the euro rally could be just a correction.
Hopes for the conflict easing in Ukraine are not the only factor encouraging the EURUSD bulls. Speculators were actively selling the single European currency, betting on its further decline, which has sent the risk reversal to the lowest level for more than ten years. The major currency pair has rallied up to 1.11 for several reasons. Traders have been exiting the euro shorts expecting a soon end of the conflict in Ukraine. Besides, markets want the ECB to give a hawkish surprise and the EU is said to be considering a new fiscal stimulus in the form of the bonds issue.
Following the dovish speeches of the ECB officials, investors felt that the ECB would ignore the record-high inflation in order not to hinder the euro-area economic recovery. Christine Lagarde signaled that the central bank is ready to maintain massive monetary stimulus longer, promising to take all necessary measures in response to the Ukrainian crisis. The ECB chief economist Philip Lane went even further, saying the ECB should put up with a CPI above 2% for an extended period of time when the region faces an adverse supply shock. He added that the central bank may consider new measures to support European financial markets.
However, Commerzbank notes that if the ECB’s inflation forecasts were in line with the swap market signals, the regulator would have to raise the interest rates in March. The ECB will not do so, but it could send a signal of potential monetary tightening to curb inflationary expectations.
Deutsche Bank believes that almost the only way to stop the rapid growth of consumer prices in the euro area is the ECB interference with the EURUSD exchange rate. The higher the oil and gas prices climb, the lower the euro falls, which presses down the euro-area GDP. According to JP Morgan, if prices remain at current levels, the euro-area economy will have to withstand a €550-billion rise in energy costs. Goldman Sachs believes the complete cessation of Russian gas supplies to Europe will deduct 2.8 percentage points from the currency bloc’s GDP. If so, the currency bloc with face the third recession in two years.
Weekly EURUSD trading plan
Unfortunately, the conflict in Ukraine won’t end immediately, and the ECB will hardly give a hawkish surprise. Furthermore, the US inflation could go up from 7.5% to 7.8%. All the above can well discourage the EURUSD bulls. If the euro doesn’t consolidate above $1.105, it will be relevant to sell.