EUR/USD choppy, a little higher in 1.1370s as US Retail Sales/Fed minutes loom and geopolitical developments eyed

• EUR/USD has been choppy on Wednesday in the run-up to US Retail Sales and Fed minutes.
• EUR/USD trades a little higher in the 1.1370s, with geopolitics set to remain the key market driver in the near-term.

EUR/USD has been choppy since the start of the European session, rising quite sharply from around the 1.1350 area as European participants arrived to nearly test the 1.1400 level shortly after the European market open. Since then, however, the pair has ebbed back to the 1.1360s, where it only very slightly in the green by about 0.1%. Indecisiveness in the run-up to the release of US January Retail Sales data at 1330GMT followed by the minutes of the January FOMC meeting at 1900GMT is not overly surprising. Traders mull the prospect for a 50bps rate hike next month following recent upside Consumer and Producer Price Inflation data surprises.

However, the more important near-term driver of the pair, for now, remains geopolitics as Russia attempts to signal to the West that it is de-escalating tensions with more conciliatory political rhetoric and releases videos showing troop withdrawals. However, NATO/Western leaders and intelligence officials have warned that there is scant proof yet of any de-escalation and Ukraine on Tuesday suffered a series of massive cyber-attacks, with Russia-backed agents the suspected culprits. Ongoing simmering tensions probably in part explain why EUR/USD on Wednesday failed to break back to the north of the 1.1400 level.

One potential flashpoint in the Ukraine/Russia situation is the latter’s likely imminent recognition of the breakaway Donetsk and Luhansk People’s Republics in Eastern Ukraine as formerly independent nations, which would contravene international law and a key peace agreement. Traders will monitor for any further signs of escalation, which could again result in underperformance of the euro and further EUR/USD downside on fears of Eurozone economic vulnerability to Russian gas import disruptions. Should tensions continue to ease, the euro might be freed up to start benefitting from the recent more hawkish tone from ECB officials in recent days (Schnabel, Villeroy and Kazaks), all of whom suggested they would back a faster QE taper and rate hikes soon thereafter.