EUR/USD is coming up for air as risk rallies on hopes of dialogue between Ukraine/Russia

EUR/USD is trading near the highs of the day as markets latch onto hopes of a breakthrough in the dialogue between Russia and Ukraine. An interview between Ukraine's president and ABC News from Monday night is being reported on in New York trade by The Associated Press.

The article has highlighted the point that Ukraine was not on the verge of becoming a NATO member and the markets are interpreting Volodymyr Zelensky's comments as withdrawal from applying for NATO membership. 

However, the fact of the matter is countries who wish to join NATO need to meet certain political, economic, and military goals. Ukraine was not formally ready to join NATO. There are a lot of criteria for NATO membership and Ukraine does not really meet any of those.

Nevertheless, President Volodymyr Zelensky has confirmed that he is no longer pressing for NATO membership in Ukraine. Additionally, Zelensky said he is open to "compromise" on the status of two breakaway pro-Russian territories that President Vladimir Putin recognized as independent just before unleashing the invasion on February 24. Thus, markets are hopeful that there can be dialogue soon and a cease-fire that could lead to an easing on sanctions that will ultimately avert an even more bloody global war. 

On the back of the sentiment, the price of oil has dropped off sharply, with US oil falling around $8.50/bbls. The gold price has also been sold-off by some 2.4% or around $50.00/oz. DXY, a measure of the US dollar vs a basket of currencies slid heavily as well by around 48 pips. 

Meanwhile, on the domestic front, there are expectations that the eurozone will increase fiscal spending to help offset the economic effects of the Russia-Ukraine conflict. This helped to bolster confidence, supporting the single currency at the start of the day. Bloomberg News reported on Tuesday that the European Union plans to jointly issue as soon as this week bonds on a potentially massive scale to finance energy and defence spending.

Eyes on ECB

Markets now await the outcome of Thursday's European Central Bank policy meeting. There is the prospect of stagflation prompting economists to suggest that policymakers might delay rate hikes until the end of the year. 

''Uncertainty and flexibility will be the theme, with nowhere near enough time or confidence to assess the impact of the rapidly-evolving situation in Ukraine on the forecast,'' analysts at TD Securities argued.

''We don't expect any real commitment beyond the next quarter, but the Governing Council does need to address risks from accelerating inflation, which is running 1.5ppt above their Dec forecasts.''