EURO OUTLOOK:
- EUR/USD soars and rises to its best level since March 17
- News that Russia has decided to drastically reduce combat operations in some cities in Ukraine to add momentum to cease-fire negotiations boosts appetite for riskier currencies while weighing on the U.S. dollar
- In this article we explore key technical levels for the EUR/USD to watch in the near term
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The euro rallied strongly against the U.S. dollar on Tuesday on news that Russia has decided to sharply reduce combat activity near Kiev and Chernigiv in an effort to de-escalate the armed conflict and give a boost to cease-fire negotiations. Against this backdrop, the EUR/USD rose as much as 1.35% to 1.1135 in the morning trade, before settling around the 1.1100 psychological mark by midday.
It is unclear whether President Putin’s government is using ongoing talks to resupply and regroup militarily for a better offensive or whether it is genuinely pursuing a shift in strategy to reach a détente amid failure to capture many Ukrainian cities in the North. There will be more information in days ahead, but traders/investors are certainly welcoming the prospect of a negotiated accord to end the fighting by cutting defensive positions and bidding risk assets higher.
The euro area has been one of the regions most negatively impacted by the war, due to its geographical proximity to the conflict and its strong trade links with Russia. In this context, 2022 regional economic growth has been substantially downgraded, while inflation forecasts have been revised sharply higher, hitting both investor and consumer confidence.
While the outlook remains subject to extraordinary uncertainty, it is worth noting that a reduction in geopolitical risks will be a tailwind that may help stabilize economic activity and sentiment in Europe. In turn, a more benign macroeconomic backdrop could allow the ECB to press ahead with its monetary policy normalization plans, narrowing yield differentials with the Fed. At this point, there are too many unknown variables, so traders will have to keep a close eye on geopolitical developments in the coming weeks to better assess the trajectory of the common currency.
EUR/USD TECHNICAL ANALYSIS
After several days of consolidation, the EUR/USD exploded higher on Tuesday, challenging a layer of resistance at 1.1125/1.1140. It is important to monitor how the tug-of-war between buyers and sellers around current levels resolves in the coming sessions, but if we see a sustained break on the topside, bulls may be emboldened to launch an attack on trendline resistance near 1.1350. On the other hand, if buying momentum wanes and price pivots to the downside, technical support comes in at 1.0950, while on further weakness, the 2022 low comes into focus.
EUR/USD TECHNICAL CHART
EUR/USD chart prepared in TradingView
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—Written by Diego Colman, Contributor
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