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ECB Preview: Euro Awaits ECB Reaction Function to Russian-Ukraine War

ECB Preview: Euro Awaits ECB Reaction Function to Russian-Ukraine War

Justin McQueen,

ECB, EUR Price Analysis & News

  • ECB to Offer Full Optionality, Normalisation Delayed, Not Derailed
  • Inflation Risks Firmly on the Upside In Light of Geopolitical Conflict

OVERVIEW: Since last month’s hawkish pivot from the ECB in response to inflation pressures, a lot has changed. Predominantly, the deterioration in geopolitics with Russia invading the Ukraine and thus much of the ECB’s hawkishness had evaporated, with money markets repricing lower. Meanwhile, the Euro had fallen as much as 4.5% against the US Dollar.

As noted, the ECB’s February meeting was meant to set up a pivot in policy for the March meeting with an acceleration in the pace of tapering, alongside signals of a potential rate hike by the end of the year. However, in light of the current backdrop, the ECB are unlikely to commit to such action, and thus offer full optionality, given the fluid situation. In turn, while normalisation looks to be delayed, it is not derailed, keep in mind that the economic fallout from the war will see inflation in the Euro Area higher for longer.

WHAT IS PRICED IN?: While OIS markets have pulled back from the peak pricing of 50bps, money markets do remain somewhat optimistic with 30bps worth of tightening priced in for 2022. This in turn, does leave the Euro at risk from a continued repricing lower, particularly against currencies where central banks will likely deliver on their rate expectations.

ECB Rate Expectations

Source: Refinitiv

ECONOMIC PROJECTIONS: The latest inflation figures showed a record high of 5.8%, up from 5.1% in January and given the current geopolitical tensions, inflation pressures show very little signs of easing. What’s more, given the staff economic projection cut-off date, which is estimated to be roughly a week before Russia announced a full scale invasion, forecasts may already be outdated. At the estimated cut-off date, Brent crude futures were around $92-94/bbl, significantly below the current price of $117/bbl.

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EUR/USD Bullish
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -8% 20% 1%
Weekly -5% 19% 3%
What does it mean for price action?
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MARKET REACTION: According to the option markets, the implied move for EUR/USD is 94pips, meanwhile following yesterday’s short squeeze, risk reversals are significantly off the lows, albeit with a moderate premium for puts. Lagarde will be walking a tight rope with higher inflation risks accompanied by lower growth risks, as such, while Lagarde and Co. will signal maximum flexibility, there is unlikely to be a great desire to push the Euro significantly lower. For now, risks remain on the downside for the Euro with the 1.1100 handle offering good resistance to fade the recent short-squeeze

Live Coverage of ECB at 13:15GMT

EUR/USD Chart: Daily Time Frame

Source: Refinitiv

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