Euro US Dollar Exchange Rate Plunges as Russia-Ukraine War Extends Euro Sell-Off
The Euro US Dollar (EUR/USD) exchange rate struck a fresh 20-month low this morning as the Ukraine crisis continues to dominate market sentiment.
At the time of writing, the EUR/USD exchange rate is trading at around $1.1090, down roughly 0.4% from today’s opening levels.
Euro (EUR) Falls as Ukraine Crisis Weighs on EUR Sentiment
The Euro (EUR) is dropping against the US Dollar (USD) today amid growing fears Russia could disrupt Eurozone energy supplies in response to Western sanctions.
As the war between Russia and Ukraine enters its seventh day, we have seen Russian forces become increasingly aggressive.
Thus far, Western allies have united, invoking a variety of economic sanctions onto the attacking country.
However, it is yet to be seen how Russia will retaliate against the EU.
EUR investors are cautious due to Europe’s dependence on Russian energy exports, which could be disrupted by Moscow or from additional sanctions from the West. Traders are particularly concerned about how this could feed through to higher inflation.
Data published this morning, reported Eurozone inflation jumped to a new record high in February.
Inflation in February rocketed up from 5.1% to 5.8%, smashing forecasts it would rise to 5.4%
This has raised questions over how the European Central Bank (ECB) will combat the current high inflation rates whilst geopolitical uncertainty poses a risk to energy supplies.
Andrew Kenningham, an economist at Capital Economics, said:
‘The war in Ukraine will add to upward pressure on inflation. The biggest impact will be via gas and oil prices, both of which are likely to be higher for longer than previously expected. Any disruption to the supply of gas from Russia could cause prices to surge again.’
On the other hand, the consumer price index for February beat both market forecasts and January’s readings of 111.1 and 110.74, respectively, printing at 111.7.
US Dollar (USD) Climbs amid Risk-Off Mood, Driven by Russia-Ukraine Warfare
The US Dollar (USD) is trading higher against the Euro (EUR) today as Russia advances further into Ukraine, weakening risk appetite.
Yesterday evening at the State of Union Address, US President Joe Biden told US citizens that Vladimir Putin had ‘badly miscalculated’ the West’s ability to unite.
Biden continued that his Russian counterpart had launched an unjust war on Ukraine and should therefore ‘pay the price’ of his actions.
Adding to the sanctions the US has already imposed upon Russia, Biden announced US airspace would be closed to Russian planes.
Meanwhile, US investors are concerned that heightened geopolitical uncertainty may cause the Federal Reserve to opt for a more cautious approach regarding future monetary policy.
This is capping the ‘Greenback’s gains as markets reprice expectations.
Currently, investors are awaiting Fed Chair, Jerome Powell’s, testimony this afternoon.
Should Powell indicate the Fed might rethink its current approach to monetary policy, it may weigh on the US Dollar.
Adding to this pressure, Michael Kantrowitz, chief investment strategist at Piper Sandler, warned that should the Fed act aggressively in the near future, it may lead to a ‘recession in 2023.’
Euro US Dollar Forecast: Ukraine Crisis to Remain Dominating Factor
Looking ahead, it is reasonably safe to assume that the Russia-Ukraine war will remain the key catalyst for the Euro US Dollar exchange rate.
As geopolitical tensions continues to mount, USD will likely benefit from risk averse trade.
The ‘Greenback’ may also be boosted by Thursday’s publication of ISM non-manufacturing PMI, forecast to increase from 59.9 to 61.
Moreover, US jobless claims are expected to decrease from 232K to 225K, showing a decline in the number of people filing for benefits.
On the other hand, a number of speeches from ECB policymakers are scheduled throughout the rest of the week’s session.
Should the contents of these speeches be broadly dovish in tone, it may place pressure on the Euro.