EUR/USD stabilizes above 1.0900 but still on track for biggest one-day drop since March 2020

• EUR/USD has stabilized in recent trade above 1.0900, on track for its biggest one-day drop since March 2020.
• The euro has been hit amid Ukraine’s war right on its doorstep and amid rising commodity prices.
• Ahead of next week’s ECB meeting, economists have been changing growth forecasts for the eurozone and talking about stagflation.

Meanwhile he EUR/USD at one point seemed on the verge of capitulation when it briefly fell below the 1.0900 level for the first time in nearly two years, but has been able to regain some footing during US trading hours. Nonetheless, at current levels around 1.0915, EUR/USD is still trading with daily losses of around 1.35%, the worst daily performance since March 2020. That puts the pair on track for a weekly decline of more than 3.0%, again, the worst performance of this type since March 2020.

The euro has been the notable underperformer of the G10 this week, as the eurozone border war in Ukraine and the associated rise in energy costs leads market participants to shred previous economic forecasts and rethink policies. ECB policy calls. Some are now calling for stagflation, an ugly economic situation in which inflation rates rise at the same time growth rates fall into negative territory. That, of course, poses a major dilemma for the ECB, which is either to tackle short-term inflation and lose growth by tightening, or to let inflation creep in and bolster growth by leaving accommodation.

The weakness of the euro suggests that traders favor the ECB choosing the latter. Meanwhile, with Friday’s strong US labor market report and other decent economic data this week supporting Fed Chairman Jerome Powell’s recently stated stance that a 25bp rate hike in March and a series of increases thereafter remains appropriate, with an option to accelerate the pace of interest rate increases if needed to control inflation, the US dollar looks comparatively much more attractive. That is before even discussing the fact that the dollar is considered more of a safe haven than the euro and the economic impact of the Ukraine war on the US is expected to be much more moderate.

Next week, geopolitics and related moves in the commodity space will continue to be key drivers for EUR/USD, with further energy price rally posing downside risks for EUR/USD (and a possible drop below 1.0900). The main events on the calendar will be the release of US consumer price inflation figures for February and the ECB’s policy announcement (including new economic forecasts) on Thursday.

Additional technical levels