Euro rises, flirts with 1.10

The euro has gained ground for a second straight day and broke above the symbolic 1.10 line before retreating.

German economic sentiment slides

German ZEW Economic Sentiment took a plunge in March, falling from 54.3 to -39.3. The massive decline of 93.6 points was the sharpest on record. The survey of financial experts shows that expectations that Germany will be hit by a recession. The war in Ukraine and the sanctions slapped on Russia have clouded the economic outlook and the survey also showed a huge jump in inflation expectations. Eurozone ZEW Economic Sentiment also tumbled, falling from 48.6 points to -38.7 points.

The euro is particularly sensitive to war in Ukraine, due to the eurozone’s geographic proximity as well as its dependence on Russia for energy supplies. Negotiations between Ukraine and Russia remain deadlocked, but any tangible progress towards a ceasefire would revive risk appetite and provide a boost to the euro.

Investors are keeping an eye on the FOMC meeting on Wednesday. A quarter-point rise is a virtual certainty and a hawkish rate statement could give a boost to the dollar. US Treasury yields have been rising, reflecting market expectations that the upcoming meeting will signal the lift-off for a series of rate hikes in the coming months. The 10-year yield has broken above the 2% line and is currently at 2.10%. The markets have priced in six or seven rate hikes this year, but there are strong reasons in favor of scaling back this projection. The war in Ukraine has caused massive uncertainty in the markets and the Fed would prefer not to make aggressive moves in such a fluid situation. As well, the surge in oil has raised worries about stagflation, so the Fed will have to be doubly cautious about the pace of its tightening.

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EUR/USD Technical

• 1.0886 is the first line of support, followed by 1.0774
• There is resistance at 1.1089 and 1.1262

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