Euro surges on broad dollar retreat

The euro has posted sharp gains and punched above the symbolic 1.10 level. In the North American session, EUR/USD is trading at 1.1031, up 1.24% on the day.

We continue to see significant volatility in the currency markets. The euro plunged 3.0% per cent last week but has reversed directions, as the US dollar has dropped against the major currencies today for the first time in five days. The greenback had rallied as skyrocketing oil prices had sapped risk appetite. On Tuesday, President Biden announced a total ban on Russian energy imports, which will put even more upward pressure on oil prices.

The mood has changed dramatically on Wednesday. A buy-the-dip move has boosted equities and led to a bond selloff, with yields falling. The dollar index has fallen sharply to 98.19, down 0.88% and the US dollar outlook is suddenly not looking so bullish.

The Fed is poised to commence its rate lift-off next week, likely by a quarter-point. That’s the easy part of the equation. What happens after that has become very unclear, especially with a full-blown war in Europe and oil prices above US 120. Fed policy makers can now add stagflation to their plate of worries, which could mean a slower pace of rate hikes than had been expected.

ECB meets as stagflation worries increase

The ECB meets on Thursday and may delay tapering and a rate hike due to stagflation worries. Inflation has not been as red-hot in the eurozone as in the US, but inflation has been accelerating and has become a serious issue for the central after years of little inflation. The ECB had sounded more hawkish in tone recently, but the conflict in Ukraine, skyrocketing oil prices and possible disruptions in Russian energy supplies to Europe has clouded the economic outlook and will likely result in a more cautious stance from the ECB in this time of extreme turbulence.

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EUR/USD Technical

• EUR/USD is putting pressure on resistance at 1.1053. Above, there is resistance at 1.1156
• There is support at 1.0886 and 1.0796

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