EURUSD is currently testing a major multi-decade support area; hence we decided to take a look at the monthly chart for this edition of the weekly Fx analysis (see chart below). For the near-term developments, take a look at the email newsletter we sent out last Friday (SL: Looking to Join the EUR Downtrend [Free Profitable Forex Newsletter, Mar 4]).

Due to the very long-term nature, the monthly support shown below is a wider area that can be defined between 1.05 and 1.10. This seems like a crucial support for the EURUSD pair, and a bearish break would likely result in further downside continuation. The next important technical zone below 1.05 would be parity (1.00).

The lows from late 2016 – to early 2017 around 1.0350 are also notable, but they will hardly hold the market if 1.05 breaks. Hence, below 1.05, the likely next destination could be parity. The monthly chart below there gets pretty scary. There is no visible support until the 0.95 and 0.90 areas, which would also be major psychological inflection points.

On the other hand, if the crucial support in this 1.05 – 1.10 area holds, then EURUSD could return within its previous ranges above 1.10. However, keep in mind the very long-term nature of this, as it could literally take many months for any of this to unfold.

After some initial hopes in the first days that the conflict will remain more limited and smaller, events over the past week, sadly, have transitioned toward a full-scale and devastating war in Ukraine. Western allies led by the EU and US continue to press Russia with more sanctions, with a full ban on Russian oil and gas apparently being discussed over the weekend. This was the reason why WTI crude oil spiked above $130 per barrel on the open this morning, while European gas prices surged to absurd levels (trading at more than 20 times the 5-year average).

It is no surprise that the US dollar is a top-performing currency in the current geopolitical and market landscape. Surging energy prices are a huge shock for the global economy. The negative effects will be especially felt stronger in European countries, while less so for the United States. This fact was also highlighted by Fed Chairman Powell in his testimony before Congress last week, and he also confirmed that a rate hike will be delivered as expected when the Fed meets next week (Mar 16).

All of this points to more strength for the US dollar. Its safe-haven characteristics and global reserve currency status should keep it a preferred choice among money managers for the foreseeable future as risk-aversion stays the dominant driver in markets. This factor, combined with the expected Fed rate hikes this year, is a strongly bullish mix for the dollar. 

The CPI report on Thursday is the key focus on the calendar and is expected to print numbers close to 8%. Given the unprecedented moves in the oil market, the number could be higher and could stay high in the following months (contrary to projections before the Russo-Ukrainian war that inflation will soon start to fall). High inflation coupled with a relatively insulated US economy from the Ukrainian war suggests that the Fed will stay hawkish this year and likely deliver at least several rate hikes (6-7 priced in).

With war raging on its eastern doorstep and inflation already running hot, the ECB is in a very tough spot going into their Thursday meeting. There is little the ECB can do to affect the negative economic shock from the war in Ukraine, and they will likely want to avoid making the economy worse by sending any hawkish signal even in the slightest form. 

At last month’s meeting (Feb 3), the ECB signaled a more hawkish stance for this year, but the Ukrainian war changes everything. So their preferred stance on Thursday will likely lean on the cautiously dovish side, and they may announce QE will run for longer to support the economy from the shock of the war.

All of this means that the EUR will remain weak for the foreseeable future, as the ECB will continue to be an outlier among central banks - keeping interest rates at zero while inflation runs above target. The geopolitical risks, general risk-aversion in the markets, and a dovish ECB are all factors that will keep the EUR currency pressured this week and probably beyond.