EUR/USD consolidates near 1.1000, with euro boosted post-positive Putin rhetoric

The euro has been one of the major beneficiaries of more positive-sounding rhetoric from Russian President Vladimir Putin on Friday, who noted “certain positive shifts” from Ukraine and said that talks have continued on a practically daily basis. In the three weeks since Russia’s invasion of Ukraine, the euro has been battered and experienced significant volatility, with the West imposing harsh sanctions on the Russian economy and Putin regime. The Eurozone thus now faces a terms of trade shock, with the prices of its major imports from Russia (energy) having skyrocketed, triggering fears of slower growth and higher inflation in the Eurozone and prompting investors to ditch euros.

But speculation/hopes for a potential meeting between Russian President Vladimir Putin and Ukrainian President Volodymyr Zelenskyy have jumped this week with the rhetoric from both sides surrounding the possibility some sort of compromise to end the war rising. This is a notable upside risk for the euro, with an element of that trade seen on Friday following Putin’s remarks. EUR/USD spiked nearly as high as the 1.1050 mark in the immediate aftermath but has since fallen back to flirt with the 1.1000 level once more where it trades roughly flat on the day. Indeed, developments on the ground in Ukraine remain downbeat and the war rumbles on with no end in sight for now.

That likely means that, for now, upside potential for the euro remains somewhat limitted. Indeed, even if there was to be a surprise peace deal between Russia and Ukraine, Western sanctions and the broader push to decouple economically from Russia will continue, meaning no near-term respite for the prices of major Eurozone commodity imports. Banks have been scrambling to revise their Eurozone economic forecasts to reflect new developments as of late and its was the ECB’s turn on Thursday. Stagflationary revisions to its forecasts (a big growth forecast downgrade and big inflation forecast upgrade for 2022) meant that the euro wasn’t able to derive lasting benefit from the bank’s more hawkish than expected shift in QE policy guidance.

Euro bears will likely be enthused by the fact that the euro’s post ECB meeting strength was so short-lived on Thursday, and by the fact that, from a technical perspective, EUR/USD still very much looks to be in a negative trend. A return to recent 22-month lows just above 1.0800 looks very much on the cards. But one upside risk that traders should keep an eye on is EU talks regarding new EU fiscal stimulus (focused on energy and defense).