EUR/USD Going Under 1.10?

Geopolitics have widened the German-US yield gap, putting downward pressure on the euro as investors evaluate the potential repercussions of a drawn-out war in Ukraine.

----------------

Increasing pressure

Since February, the sum of pressures on the euro has turned negative. That was primarily because investors expected inflation to be higher in other major currencies, forcing those central banks to raise rates. Meanwhile, the ECB expected to keep rates negative for the remainder of the year.

German GDP came in with negative growth, suggesting that Europe was looking to have at best a lacklustre economic performance. That would hinder the ECB from tightening as much and would likely keep inflationary pressures low in any case. Although there was some talk that the EBC would have to take some measures to address inflation, the outlook remained significantly lower than comparable currencies, notably the dollar

Risk-off and a shaky future

The initial assessment that Russia's invasion of Ukraine would be over quickly appears not to be panning out. Of the major economies, Europe has the closest ties to Russia. And with the dispute putting pressure on the energy markets, Europe's dependence on imported Russian fuel creates additional risks for the economy.

More and more Euro companies are either shutting operations, divesting operations, or suspending shipping to Russia. That comes at varying costs to those firms. Wednesday morning saw both Kuehne + Nagel and Deutsche Post announce they were suspending shipments to Russia after Maersk announced similar measures already this week. 

Uncertainty remains the name of the game

German bund yields slipped to negative as European investors sought security in uncertain times. The drop in yields is likely to remain as long as the situation in Ukraine remains unresolved. With lower yields and the increasing risk of a German recession coming, the euro could be under pressure for quite some time.

EUR/USD at multiyear lows, and counting

Euro hit a ~2-year low against its dollar counterpart on Wednesday. The currency has lost a considerable ~3.7% versus the greenback since the start of February.

EUR/USD has been down-trending for the best part of a year but as of 2022 is consolidating inside a clear box pattern with a ceiling at 1.15 and a floor at 1.11. Whichever of these breaks, will likely determine the medium-term direction for the forex pair. 

Should the pair break lower - it faces the critical 1.10 psychological level. Which if/when it gives way could see losses accelerate as stop losses on euro bulls get triggered.

Key takeaways

Given the current geopolitical complications, downward pressure on EURUSD is likely to persist as investors shift to safer assets. Traders must re-assess Europe's dependence on Russia to gauge where the euro might be heading. 

If EU companies keep announcing distancing measures against Russia, the euro will likely weaken further. Even if the situation de-escalates, dovish rhetoric around the ECB could cap any rallies.