Euro US Dollar Exchange Rate Nosedives as West Significantly Ramps Up Sanctions against Russia
The Euro US Dollar (EUR/USD) exchange rate is falling today as geopolitical tensions remain high in response to Russian military invading its peaceful neighbour.
At the time of writing, the EUR/USD exchange rate is trading at around $1.1214, down roughly 0.5% from today’s opening levels.
Euro (EUR) Slumps amid Concerns over Impact of Sanctions on EU economy
The Euro (EUR) is dropping against the US Dollar (USD) today amidst concerns over the impact new Western sanctions on Russia could have on the Eurozone.
As the provider of 40% of Europe’s oil, Russia has the opportunity to disrupt energy supplies.
This may significantly hit the Eurozone economy as increased energy prices will bolster inflationary pressures and suppress consumer spending.
In turn, this may delay the European Central Bank (ECB) in tightening its monetary policy. EUR investors had previously begun pricing in a rate hike for the fourth quarter, however this seems increasingly unlikely.
Meanwhile EBC policymaker, Fabio Panetta, struck a broadly dovish tone in a speech earlier today, which is further limiting demand for the Euro.
Panetta said:
‘Faced with such uncertainty, there is a case for the central bank to accompany the recovery with a light touch, taking moderate and careful steps in adjusting policy, so as not to suffocate the as yet incomplete recovery.
‘In this environment, it would be unwise to pre-commit on future policy steps until the fallout from the current crisis becomes clearer.
‘And the ECB stands ready to act to avoid any dislocation in financial markets that could stem from the war in Ukraine and to protect the transmission of monetary policy.’
US Dollar (USD) Surges as Geopolitical Tensions Promote Risk-Off Trade
The US Dollar (USD) is climbing against the Euro (EUR) today as investors flock to the safe haven currency amidst heightened geopolitical tensions.
The ‘Greenback’ is strengthening against the majority of its peers as developments in Ukraine evolve, generating a risk-off sentiment.
However, the Russia-Ukraine war is dampening rate hike bets and thus capping USD’s potential.
Investors are repricing the likelihood of the Federal Reserve delivering an aggressive monetary policy at its next meeting.
Last week, markets expected the Fed to produce a 50 basis point hike. Today, this has been halved to 25bps.
Jim Paulsen, chief investment strategist at the Leuthold Group, said:
‘I’m not so worried about whether they do 50 [basis] points out of the gate or not. But I also think they shouldn’t overdo it here.
‘You can do 25, and if you want to do another one soon, you can do it, rather than add additional disruption or uncertainty.’
Euro US Dollar Forecast: Ukraine Crisis to Dominate Headlines for Foreseeable Future
As the Russia-Ukraine war rages on, it is likely to remain a key catalyst of movement for the Euro US Dollar exchange rate in the near-term.
Any further escalation in tensions could see the pairing test a new 20-month low.
ECB President, Christine Lagarde, is scheduled to speak later today. Should Lagarde echo the dovish tone of Panetta, it is likely to weigh on the single currency.
However, EUR exchange rates may be bolstered by Germany’s consumer price index, as economists forecast inflation in the Eurozone’s largest economy may have accelerated again this month.
On the other hand, the ‘Greenback’ may be boosted by February’s US ISM manufacturing PMI if growth in the US factory sector accelerated as forecast.