EUR/USD Weekly Forecast: War drums in Eastern Europe to keep dampening the mood

The EUR/USD pair ends the week little changed, trading in the 1.1350/60 price zone. Financial activity was all about the sentiment, with the latter directly linked to headlines related to geopolitical tensions between Russia and Ukraine. The situation on the border remains uncertain, after some shelling took place in Donbass on Thursday, sounding all alarm bells in the West. US President Joe Biden said that Moscow is preparing a pretext to invade Ukraine, while Russian President Vladimir Putin accused Washington of ignoring its security demands.

Sentiment likely to hold the grip

Risk-related sentiment improved temporarily throughout the week, mostly when headlines suggested Russia was pulling back troops. By the end of the week, however, Moscow announced new drills on Saturday. For the most part, the market mood was sour, with investors moving away from higher-yielding assets. For a change, the dollar was left aside to the benefit of other safe-haven assets such as gold or the JPY, resulting in pairs such as EUR/USD holding within tight ranges.

Elsewhere, stocks fell, and Wall Street was down for a second consecutive week, reflecting the cautious tone, while US government bonds appreciated, resulting in lower yields, which somehow added to the greenback’s lack of strength.

Will Russia finally invade Kyiv? And what could happen then? Well, it seems more likely that Putin get away with what he wants, that is, taking control over Ukraine and preventing the country from adopting a westernized lifestyle than having a strong response from the West, despite the strong wording from NATO leaders. Such a scenario will likely maintain financial markets in risk-off mode for a while, but it seems unlikely it will remain as the main market motor for longer than a couple of more weeks.

Measured Fed disappoints investors

US Federal Reserve officials keep hinting at upcoming rate hikes. The central bank released the Minutes of the latest FOMC meeting on Wednesday, and the document confirmed what the market already knew. Policymakers are ready to hike and are moving on with plans to reduce their balance sheet. Investors were disappointed about voting members maintaining a measured approach to monetary policy tightening. Ahead of the release, speculative interest was pricing in up to a 75 bps hike in March, down to 50 bps after the event, another factor weighing negatively on the dollar’s demand.

The macroeconomic calendar included some relevant figures that, anyway, failed to impress. The EU published the second estimate of its Q4 Gross Domestic Product, which was confirmed at 0.3% QoQ. Germany unveiled the February ZEW Survey, which showed that Economic Sentiment missed expectations in the country, printing 54.3, while that for the EU contracted by less than anticipated to 48.6.

The US published January Retail Sales, which unexpectedly increased by 3.8% in the month, much better than the 2.0% expected. Industrial Production and Capacity Utilization improved in January, although Initial Jobless Claims were up to 248K in the week ended February 11.

What’s next in the calendar

The upcoming week will be a busier one in terms of data, as it will start with Markit releasing the preliminary estimates of its February PMIs for Europe and the US. Germany will publish the IFO Business Climate survey and the GFK Consumer Confidence Survey, while the EU will unveil January inflation estimates.

The US calendar includes the second estimate of Q4 Gross Domestic Product and January Durable Goods Orders, among other minor reports.

EUR/USD technical outlook

The weekly chart for the EUR/USD pair shows that, despite trading in the green, it has posted a lower low and a lower high, which skews the risk to the downside. Furthermore, a firmly bearish 20 SMA capped advances, providing resistance alongside a Fibonacci level at around the 1.1400 threshold. Technical indicators have seesawed within negative levels, heading into the close without directional strength.

The daily chart shows that the pair has spent the last three days in consolidation mode, above a flat 20 SMA but below a bearish 100 SMA. The Momentum indicator approached overbought levels but turned firmly lower, while the RSI indicator remains lifeless around 51, reflecting the absence of speculative interest.

Chances of a firmer advance should increase if the pair breaks above 1.1400, while the next relevant resistance level is 1.1470. Beyond the latter, the pair has room to run up to the 1.1600/20 price zone. The 1.1300 level provides support ahead of 1.1240. If the latter gives up, the pair can extend its decline towards 1.1160, en route to the yearly low at 1.1120. 

EUR/USD sentiment poll

The FXStreet Forecast Poll indicates that speculative interest is still belting for King Dollar. Bears outcome bulls in the three time-frame under study, standing above 70% in the monthly and quarterly views. The range of possible targets is well limited in the next couple of weeks, reflecting the ongoing uncertainty, as the pair is seen holding pretty much between 1.1000 and 1.1400. However, the spread of possible targets widens in the quarterly view, with the pair seen as low as 1.0500 and as high as 1.2200.

The Overview chart shows that the moving averages have lost their previous bullish slopes, now offering neutral-to-bearish stances. It is also notable that, in every time frame forecasted, most targets accumulate around or below the current level.