EUR/USD consolidates at 1.1200, euro the major G10 underperformer as markets assess Russia sanctions fallout

• EUR/USD has rebounded from lows just above 1.1100 towards the 1.1200 level but continues to trade with substantial on-the-day losses.
• The euro is the major G10 underperformer as markets assess the consequences of the latest EU/Western sanctions against Russia.

After coming within a whisker of printing fresh annual lows near the 1.1100 level at the re-open of Monday Asia Pacific trade, as markets digest the weekend’s geopolitical developments, EUR/USD has been erratic but staged a reasonable comeback. Having been as much as 1.3% lower on the day when trading at lows in the 1.1110s, the pair now trades down closer to 0.7% on the day at the 1.1200 level. Uncertainty regarding the economic impact of the latest round of EU/Western sanctions against Russia, which include the blocking of some Russian banks from SWIFT and the freezing of a large portion of the CBR reserves, will likely knee-cap short-term rallies.

An emergent consensus view of the past few sessions since Russia’s invasion of Ukraine has been that ECB tightening, previously thought to begin as soon as Q4 this year, will now be substantially delayed. The Eurozone economy now faces potentially significant disruption to its energy supply, with higher associated energy costs set to further eat into living standards, as well as a generalised hit to economic confidence with a war on its doorstep. This likely explains why the euro is the major underperforming G10 currency on Monday.

US data this week in the form of the January jobs report January ISM surveys, as well as Fed speak with Chair Jerome Powell delivering his semi-annual testimony before Congress, is likely to remind markets that the Fed remains on its tightening path. That, coupled with a continued safe-haven-related USD bid as the Ukraine war rumbles on and euro underperformance on economic uncertainty, is likely to keep EUR/USD gains capped. One risk event to watch on Monday is talks between a Ukrainian and Russian delegation on the Ukraine/Belarus border. If talks deliver a ceasefire (not expected), that could see safe-haven demand unwind and the euro rebound back towards 1.1300.