EUR/USD enjoying strong rebound, eyeing 1.10 as risk appetite improves, commodity prices pull back

The euro and other European currencies are benefitting from a broader rebound in risk appetite as global equity markets are supported by dip-buying and major commodity prices fall back from recent highs amid profit-taking. With the improved market mood weighing on the demand for the safe-haven US dollar, EUR/USD has been able to rebound back into the upper 1.0900s and at one point came close to testing 1.10. At current levels around the 1.0970-mark, the pair trades about 0.7% higher on the day, taking its rebound from Monday’s 22-month lows near 1.0800 to over 1.5%.

As oil, gas and other major commodities ease back from highs, this is easing Eurozone stagflation fears and facilitating the rebound, with traders also citing fiscal stimulus hopes after Bloomberg reported earlier this week that the EU was mulling joint bond issuance. But traders cautioned that it remains far too soon to call an end to the broad commodity bull-run and for a sustained EUR/USD rebound. After the US banned Russian oil imports and the UK announced plans to phase them out, markets now await the Russian response. Meanwhile, though Russia did say “some progress” has been made in recent talks with Ukraine, expectations for a ceasefire/broader peace deal to be reached anytime soon remain low.

Another factor weighing on the prospect for a sustained EUR/USD rebound is the proximity of the upcoming ECB meeting on Thursday – many traders, particularly those placing longer-term bets, may wish to keep their powder dry ahead of the event. The ECB will provide new economic forecasts, a challenging task in the face of current economic uncertainties. Prior to the Russian invasion of Ukraine, consensus thinking was that the central bank would speed up its QE taper to end net purchases by the end of Q3, paving the way for a rate hike in Q4. With these expectations having been seriously called into question as higher commodity prices raise the risk of Eurozone stagflation, EUR/USD traders may be reluctant to buy the pair above the 1.10 mark.