Euro Sinks as Russia Attacks Ukraine and Markets Sour. Will EUR/USD Set New Lows?

[MongiIG]

EURO, EUR/USD, UKRAINE, RUSSIA, ECB – TECHNICAL OUTLOOK

• Euro tumbles as Russia attacks Ukraine, geopolitical tensions simmer
• All eyes are on Western response as 2022 ECB rate hike bets dwindle
• EUR/USD still remains in a key range, will breakout lower follow?

The Euro tumbled as Russia’s President Vladimir Putin commenced a ‘military operation’ in Ukraine during Thursday’s Asia-Pacific session. He added that he was ‘not planning’ on occupying the nation. EUR/USD one-week implied volatility jumped to the highest since early December 2021. It was the worst 4-hour drop since the beginning of this year and puts the single currency at risk in an uncertain environment.

Ukraine called Russia’s aggression a ‘full-scale invasion’ and US President Joe Biden said that the country will impose ‘severe sanctions’ on Russia in the coming hours. UK Prime Minister Boris Johnson said that the country and its allies will respond decisively. According to Bloomberg, Russia confirmed that it was targeting Ukrainian military facilities. Reports crossed the wires of missiles attacking Kyiv.

The unfolding crisis seeped into global risk appetite. On the 15-minute chart below, the Euro can be seen falling alongside S&P 500 futures as well as the sentiment-linked Australian Dollar. Gold prices soared to the highest since January 2021. This is as futures tracking the tech-heavy Nasdaq 100 declined and approached levels last seen in May 2021. The stock index is heading for the worst month since 2008.

Aside from proximity risks, the Euro may also be vulnerable to fading hawkish European Central Bank (ECB) policy expectations. DAX 40 futures sank over 4% during APAC trade, with the German benchmark stock index heading for the worst daily performance since late November. VIX futures jumped to 33.70, the highest since November 2020 as market fear settled in.

The situation continues to unfold rapidly, and all eyes are on the Western response. Ukraine is also complicating the Federal Reserve’s expected monetary tightening effort as local inflation runs at a 40-year high. US PCE data – the Fed’s favored inflation measure – is due on Friday. Crude oil prices also surged, with WTI touching US$ 97 after being at 92 by Wednesday’s close. The latter risks bolstering inflation estimates further.

MARKET REACTION TO UKRAINE CRISIS 15-MINUTE CHART

Chart Created in TradingView

EURO TECHNICAL ANALYSIS

EUR/USD is nearing the key 1.1122 – 1.1186 support zone following the developing Ukraine crisis. This follows a rejection of the 1.1453 – 1.1495 resistance zone after a Doji candlestick pattern formed. As I mentioned last week, a bearish chart formation is brewing in a majors-based Euro index. That could hint at downtrend resumption. For the time being, the single currency remains in a consolidative state until a breakout is found. Clearing support exposes the 61.8% Fibonacci extension at 1.1048.

 

EUR/USD DAILY CHART

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com. 24th Feb 2022