EUR/USD Supported After Monday’s Drop to Nearly 2-Year Lows

Russia-Ukraine Negations

The military conflict between Russia and Ukraine has entered the thirteenth day, while the third round of negotiation between the two countries has not produced any major breakthrough.

Ukranian Presidential Adviser Mykhailo Podoliak said that "There are no results that significantly improve the situation yet" ^[1], while President Zelenskyy hinted at more new round of discussions, noting that "So we will talk. We will insist on negotiations until we find a way to tell our people: this is how we will come to peace" ^[2].

Russian Energy Supply

After a series of sanctions against Russia, Western countries are discussing the possibility of posing an embargo on energy imports from Russia.

US Secretary of State Blinken opened the door to that, with a series of media appearances on Sunday. Speaking on CNN on Sunday, he commented that "We are now in very active discussions with our European partners about banning the import of Russian oil to our countries". ^[3]

US House of Speaker Ms Pelosi announced that lawmakers are already exploring legislation, which "would ban the import of Russian oil and energy products into the United States" ^[4], while White House Press Secretary Ms Psaki commented that "no decision has been made at this point by the President" on the subject .

This is a more difficult topic for Europe, which depends on oil and gas imports from Russia, with German Chancellor Olaf Scholz pushing back against energy sanctions, since the supply cannot be secured in any other way at this point, as reported by Politico yesterday ^[6]

Russia's Deputy Prime Minister Alexander Novak warned on Monday that his country has every right to impose an embargo on the gas pumped via the Nord Stream 1 pipeline, following Germany's ban on Nord Stream 2, as reported by Interfax. ^[7]

European Central Bank (ECB)

The European Central bank meets on Thursday to hand down its monetary policy decision, having already announced a plan to scale down its asset purchases, starting from April. A rate hike by the ECB is still far away, but President Lagarde had not ruled out an increase in 2022 during her February press conference, which was received as a hawkish shift. ^[8]

However, the war in Ukraine creates prospects of a slowdown in economic activity, which along with persistently high inflation, has begun to create fears of stagflation. This has thrown a curve ball to the ECB's tightening prospects, so we will be closely monitoring Ms Lagarde's post-decision press conference.

Eurozone's preliminary data for February, showed CPI rising to 5.8% year-over-year, from final 5.1% y/y in January. Data just released, showed final Gross Domestic Product (GDP) at 4.6% year-over-year in the fourth quarter.

EUR/USD

The common currency has reacted poorly to the news of war in Ukraine and Western sanctions against Russia, coming from its worst week against the greenback since the start of the pandemic, while the current one is the fifth straight negative one.

On Monday, it dropped to new nearly two-year lows (1.0339) and despite today's reaction, it is vulnerable to fresh lows, although it may be aearly for a test 1.0635.

From a technical prospective, the move is overextended and the pair finds support today, which may give it the chance to push higher, but a strong catalyst will be needed for move beyond 1.1000.

Caution is needed as volatility remains high and markets react to news around Russia and Ukraine ahead of Thursday's ECB decision, which could determine the pair's trajectory.