Euro breaks below $1,10 despite hawkish ECB stance

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Vrasidas Neofytou
Head of Investment Research

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Euro breaks below $1,10 despite hawkish ECB stance

The common currency lost almost 1% on Thursday, falling below $1,10 key support level as the growing concerns over the ongoing Ukraine-Russia military conflict and worries over stagflation offset the hawkish turn of the European Central Bank to normalize monetary policy.

EUR/USD pair, Daily chart

The Russian invasion of Ukraine has weighed on Euro which fell to as low as $1,08 mark on Monday, March 07, its lowest level since May 2020, before bouncing above $1,11 on Thursday in hopes for a positive result on the planned talks between Ukraine and Russia's foreign ministers in Turkey, which eventually faded.

Forex investors jumped into the safety of the U.S dollar, Japanese Yen, and Swiss Franc and moved away from the war-sensitive Euro following the geopolitical uncertainty and worries over Eurozone’s growth outlook.

The DXY-U.S. dollar index has gained more than 3% this year, rallying towards the 99,50 mark, its highest level in 21 months, pushing the EUR/USD pair below $1,10 key psychological support level, its lowest level in 2 years.

The hawkish stance from ECB and the threat of stagflation:

The Euro jumped to as high as $1,1120 yesterday after the ECB’s chair Christine Lagarde said that the bank will phase out its pandemic-led bond buying program in Q3, 2022, opening the door to an interest rate hike at the end of the year to curb surging inflation, before reversed below $1,10 on Ukraine crisis and stagflation fears.

According to ECB President Christine Lagarde, “Any adjustment to the key ECB interest rates will take place sometime after the end of our net purchases under the APP (Asset Purchase Program) and will be gradual.”

Investors worry for a stagflation period in the Eurozone’s economy as ECB modestly downgraded its growth forecasts for 2022 and next, ramping up inflation expectations, with Lagarde adding that the Russian invasion was a "watershed for Europe", which would curb growth but boost inflation.

Eurozone has been struggling with surging oil and natural gas prices, record-high electricity costs, and soaring industrial metal prices since the Q4, 2021 when Russia started increasing its troops on Ukraine’s borders, which are posing a significant threat to the continent’s commodities-dependent economies and to the much more vulnerable to Russian sanctions Europe’s manufacturing sector.

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