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Market Insights

Euro analysis and forecast

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The impact of Russia’s invasion of the Ukraine on the Eurozone is severe but the euro has rallied to the upside on optimism about a Russia-Ukraine ceasefire. Is the rally a sell or could we see more upside? A summary of the fundamentals, sentiment and technicals below.

A quick solution to the Russia Ukraine crisis looks unlikely which we can see on the chart below:

Fraught paths to Russia-Ukraine resolution

Even with a solution to the crisis, the sanctions on Russia are unlikely to be removed and commodity imports to the EU from Russia will remain expensive. The Eurozone is heavily reliant on Russia in terms of energy imports, particularly Natural Gas. The chart below shows the impact on economic growth of disruptions to natural gas imports in terms of the major economies in the zone.

Nat Gas from Russia as share of energy supply

Can the ECB Raise Interest Rates While Economic Growth Slows?

There is high inflation in the zone and many investors expect the ECB to cut its stimulus program and move to hike interest rates. Money markets are discounting increases of nearly 50 basis points in terms of the ECB's deposit rate by the end of this year which looks optimistic against the current state of the economy. The ECB have indicated that they will prioritise growth over inflation and have stated they will be cautious in terms of raising rates.

In the US, economic growth is robust and inflation is at a 40 year high and against this backdrop the Fed have indicated they will cut stimulus and start raising rates at their next meeting. Money markets are discounting the Fed will hike interest rates seven times this year and three more times in 2023.

In terms of EUR/USD, we have seen the EUR rally up from 1.0800 to over 1.011 and we are now coming up to major resistance levels. Large speculative funds are long the euro but the long term economic fundamentals favour the USD which could warn of another move down to daily chart lows and longer term a move down to monthly support.

Technical Analysis

In terms of the monthly chart we have big resistance at 1.1300 and support at 1.0500. On the daily chart resistance levels at 1.1200 then 1.1300 and support at the spike tail at 1.0800.

EUR USD Monthly chart

EUR USD Daily Chart

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