EUR/USD is under downward pressure, 1.10 in the crosshairs – Scotiabank

EUR/USD is pressured by Omicron spread and energy concerns. Additionally, the European Central Bank (ECB) monetary policy is set to contrast the path of the Federal Reserve, dragging the pair down towards the 1.10 level, economists at Scotiabank report.

EUR/USD to head towards 1.10

“Over the weekend, Germany’s Foreign Minister Baerbock noted that the Nord Stream 2 pipeline (through the Baltic Sea) cannot be certified as it does not meet requirements of European energy law. Today, Belarus’ Lukashenko warned that his country may halt gas transit through it to Europe if the G-7 deploys new sanctions on Russia over its military threat in Ukraine (the other key path for Russian gas transports to Europe).”

“The ECB meeting this week will likely see the bank hold back on signaling clearly how (and by how much) it intends to replace the PEPP (read: supplement the APP) once it expires in March. Prior to the emergence of Omicron, the bank looked set to deliver a less dovish decision and express optimism in the economic recovery. However, the new virus wave and more restrictions that look set to depress output over the next few weeks and perhaps months will see the ECB punt a clearer decision to the new year.”

“The ECB’s contrast to the Fed, which is expected to accelerate its reduction of asset buying this week, will weigh on the EUR toward the 1.10 zone in the near-term.”