ECONOMY

Putin puts the world on its toes, investors run to safety

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  • Central banks’ plans smashed by the Russian war on Ukraine, creating unknown levels of uncertainty.
  • Inflation returned to the spotlight amid skyrocketing commodities’ prices.
  • EUR/USD pierced the 1.1000 level, further signaling a continued decline ahead.

The EUR/USD pair traded has hit a low of 1.0885 – a level not seen since May 2020. Much of the shared currency’s losses can be attributed to the war going on at its borders. The Russian invasion of Ukraine is now on its ninth day, and regardless of two rounds of peace talks, Moscow has shelled Europe’s largest nuclear plant, Zaporizhzhia, on Friday. An explosion there could be as much as ten times worse than that in Chernobyl.

War drums hit the market’s optimism

Leaders from all the West’s nations have called on President Vladimir Putin to put a halt to the war, but to no avail. On Thursday, he said that he aims to reach his goals and will continue no matter what. And while Putin agreed on the creation of safe corridors to evacuate civilians, he persisted in bombing Ukrainian cities.

For financial markets, the weekly developments resulted in skyrocketing commodities’ prices, particularly those related to energy. Gas and oil prices reached multi-year highs, exacerbated by news that gas flows along the Yamal-Europe pipeline came to a halt. Also, EU shares with business exposure to Russia plummeted, although those related to defense and cybersecurity rose sharply.

Global financial sanctions are pushing the Russian economy to the brink of default. The ruble plunged to record lows, while local stock markets were closed throughout the week. Nevertheless, the invasion continues to escalate, and the number of civilian casualties increases on a daily basis. The risk-averse environment gave a boost to safe-haven assets, with the greenback particularly appreciating against its European rivals.

Central bankers fighting inflation too late

Meanwhile, inflationary pressures have returned to the spotlight. Worldwide central bankers noted that the Russian-Ukrainian war would worsen inflation while creating new levels of uncertainty.

The European Central Bank released the accounts of its latest meeting, which showed that members believed a scaling-back of monetary accommodation should commence, adding that members believe that inflation was likely to continue higher-than-predicted for longer. Additionally, policymakers noted that the greatest risk was no longer tightening monetary policy too soon but too late. Market players have forward chances of an ECB hike from 2023 to later this year.

Across the pond, US Federal Reserve chief Powell tested on the Semi-Annual Monetary Policy Report before Congress, saying that he would be comfortable with a 25 bps hike this March, although adding that it could be more than that if price pressures justify so.

With the ongoing war pushing raw materials and commodities prices to multi-year highs, however, it seems that whatever central bankers do may be too little, too late.

Data wise, Germany reported the preliminary estimate of the February Consumer Price Index jumped to 5.1% YoY. The EU inflation in the same period reached a record high of 5.8%, with no sign of receding, but on the contrary, pushing higher.

The US published the February ISM PMIs, with the manufacturing index coming in better than anticipated by printing 58.5, but the services one disappointing as per falling to 56.5. By the end of the week, the country released the February Nonfarm Payrolls report, which showed that the country managed to add 678K new jobs in the month. The Unemployment Rate contracted to 3.9%, while the Participation Rate increased to 62.3%, all of which pushed the greenback further up.

The upcoming week will start in slow motion on the fundamental front, as the only relevant figure in the macroeconomic calendar is the final version of the EU Q4 Gross Domestic Product. On Thursday, however, the European Central Bank is having a policy meeting, while the US will release February inflation figures, expected to print at 7.8% YoY.

EUR/USD technical outlook

Having already pierced the psychologically significant 1.1000 level, the EUR/USD pair has now room to extend its slump to 1.0870, May 2020 monthly low. The weekly chart signals further declines ahead, as technical indicators head south almost vertically, and approach oversold readings. Meanwhile, the 20 SMA accelerated its slide below the longer ones, currently at around 1.1350.

The pair is oversold in the daily chart, without signs of exhaustion. Technical indicators keep heading firmly lower despite being at extreme levels as the pair develops over 300 pips below the nearest moving average. Corrective advances are possible, but sellers will likely take their chances on bounces.

The first line of technical resistance comes at 1.1030, followed by the 1.1100/20 price zone. Beyond the latter, the pair could near 1.1200 and still retain its long-term bearish stance. On the other hand, support comes in at the aforementioned 1.0870, while below it, 1.0760 is the next potential target for bears.

EUR/USD sentiment poll

Tea FXStreet Forecast Poll for the EUR/USD pair shows that market players were hardly expecting the sharp slide seen on Friday. Most analysts were not expecting the pair to piece the 1.1000 threshold, that’s why the pair is seen bullish in the three time-frame under study, although holding below 1.1200 on average.

According to the Overview chart, the risk is skewed to the downside in the near term, as the moving average heads firmly south at around 1.1000. On the other hand, the longer moving averages offer modest bearish slopes, as the range of possible targets is quite limited at around the 1.1000 figure.

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