EUR Update: Fluid backdrop to keep volatility elevated

Two months in and 2022 has already made for a turbulent year for the euro given the volatile monetary outlook and heightened regional geopolitical risks. In January, a staggeringly hawkish rate path for the Fed, as implied by short-term interest rate instruments, sent EURUSD down to the 1.11 handle, with the year-to-date low registered when Fed Chair Powell signalled there is “plenty of room to raise rates”. Not long after that, the ECB switched sides to team hawk as ECB President Lagarde notably emphasised the upside risks to inflation at February’s meeting. This, along with a reluctance by Lagarde to deny a rate hike in 2022 like she did in December’s meeting, led markets to believe a hawkish pivot at the March meeting is incoming. This helped EURUSD to recover back to 1.1450 before several ECB speakers spoke to the media and stated markets were getting ahead of themselves, capping some of the euro’s gains. On top of the pushback by some Governing Council members, headlines confirming that a Russian invasion in Ukraine is becoming more likely weighed on the single currency as Europe’s gas supply, and in turn, its inflationary backdrop is at stake. The ongoing political risk in Europe means EURUSD is going to remain an easy target within the G10, while rising US Treasury yields the euro’s sensitivity to them will also be a risk. Looking over to H2, an improvement in global growth conditions will be more deterministic for the euro when the monetary outlook and political backdrop has become more stable.

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Author: Ima Sammani, FX Market Analyst

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