Euro Outlook:
- The Euro[1] continues to struggle in the wake of the sanctions against Russia, as funding market stresses stoke demand for US Dollars.
- EUR/JPY[2] rates are dropping towards their multi-decade descending trendline from all-time highs; EUR/USD[3] rates have just broken out of a range; EUR/GBP[4] rates are closing in on their lowest levels since the Brexit vote in 2016.
- Per the IG Client Sentiment Index[5], EUR/GBP[6] and EUR/USD[7] rates have a bearish bias, while EUR/JPY[8] rates are on neutral ground.
Funding Stresses High, ECB Retreating
The Russian invasion of Ukraine, and subsequent sanctions by the European Union and United States[9], has proved costly to the Euro on two fronts. First, market expectations for a more hawkish European Central Bank have evaporated[10] over the past week, widening the chasm between the ECB and central banks like the Bank of England and Federal Reserve. Second, liquidity conditions have deteriorated (as measured by EUR/USD basis swaps), underscoring the greatest demand for US Dollars by financial institutions since the early days of the COVID-19 pandemic.
With the largest ground war in Europe since World War 2 under way, the economic fallout has only just begun. While a more widespread conflict drawing in European Union countries and NATO forces has thus far been avoided, traders are treating the Euro as if the worst is yet to come. Both the fundamental and technical narratives suggest more downside is likely in the near-term for EUR/GBP, EUR/JPY, and EUR/USD rates.
EUR/USD RATE TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2022) (CHART 1)
EUR/USD rates have established fresh yearly lows, falling below 1.1050 for the first time
