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Euro Forecast: EUR/USD Soars as Ukraine Crisis Cools, but ECB Could Kill Momentum

Euro Forecast: EUR/USD Soars as Ukraine Crisis Cools, but ECB Could Kill Momentum

Diego Colman, Market Analyst

EUR/USD OUTLOOK:

  • EUR/USD surges more than 1.5% amid risk-on sentiment across financial markets
  • Geopolitical tensions in Eastern Europe seem to be easing, but the situation could change again in the blink of an eye, as the crisis is far from resolved
  • The ECB is on tap Thursday. The central bank is expected to keep interest rates unchanged. Policymakers are also likely to backtrack on their promises to end QE in the third quarter.

Most read: Japanese Yen Technical Analysis - USD/JPY, EUR/JPY, GBP/JPY, AUD/JPY

The euro is rallying against the U.S. dollar in midday trading Wednesday,ahead of the European Central Bank's monetary policy decision scheduled for Thursday. At the time of writing, EUR/USD is up 1.6% to 1.1068 and gaining for the second day in a row, supported by broad-based risk-on mood and news that European Union countries are in preliminary talks to issue joint debt to finance energy and defense spending.

Geopolitical jitters have weighed on marketsover the last few weeks, but sentiment appears to be improving on speculation that Russia and Ukraine may reach a ceasefire soon following reports that Kiev is no longer vying for NATO membership and is ready for a diplomatic solution. As a result, the aggressive rally in several raw materials that have spooked investors recently is cooling, with oil (Brent crude) down more than 7% on the session.

Looking ahead, a military détente in Eastern Europe could ease upward pressures on commodity prices, which would help reduce energy costs and stagflation fears. In any case, the situation is fluid and far from resolved, so traders should continually monitor the news to see how the crisis evolves to avoid getting caught on the wrong side of the trade.

Turning our attention to other catalysts, the ECB is on tap tomorrow. The bank is expected to keep its three key interest rates unchanged and refrain from laying out a formal quantitative easing exit strategy.

Given that the economic outlook is subject to extraordinary uncertainty due to growing geopolitical headwinds, policymakers are likely to advocate for“maximum flexibility” in their stance on the asset purchase program (APP), despite signaling last month that the scheme could end in the third quarter. Any move to walk back previous pledges regarding the normalization cycle will fuel dovish repricing of rate expectations, triggering a sell-off in the euro. For the EUR/USD, this means that the rebound seen in the last two days may be short-lived and that sellers may regain control of the market in the coming days.

EUR/USD TECHNICAL ANALYSIS

After advancing for two days, the EUR/USD has decisively reclaimed the 1.1000 handle and is steadily approaching a technical resistance in the 1.1115 area. If buyers manage to push the exchange rate above this barrier, the next ceiling appears at 1.1190 and then 1.1275, where the 50-day moving average is currently located. On the flip side, if EUR/USD fails to sustain its recent strength and pivots to the downside, the first support to consider lies at the 2022 low near 1.0810. If we see a move below this floor, selling interest could accelerate, exposing the April 2020 low at 1.0727.

EUR/USD TECHNICAL CHART

Euro Forecast: EUR/USD Soars as Ukraine Crisis Cools, but ECB Could Kill Momentum

EUR/USD chart prepared in TradingView

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---Written by Diego Colman, Contributor

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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