EUR/USD looks offered and challenges 1.1300 on persistent risk aversion

• EUR/USD extends the downside and retests the sub-1.1300 area.
• The dollar remains bid on increasing risk aversion following geopolitics.
• Germany IFO survey, US Consumer Confidence next of note in the docket.

The single currency remains at the mercy of the selling pressure, with EUR/USD breaking below the 1.1300 support to clinch new multi-day lows in the 1.1290/85 band.

EUR/USD weaker on USD-buying

EUR/USD loses ground for the fourth consecutive session on turnaround Tuesday, this time hurt by the increasing risk aversion mood that lends extra wings to the greenback.

Indeed, rising safe haven inflows underpins the demand for the dollar in response to the quick deterioration of the geopolitical scenario after Russian military prepare to move into the separatist provinces of Donetsk and Luhansk.

In the meantime, yields of the US 10y benchmark note grind lower following the prevailing risk-off sentiment vs. the small improvement in yields of the German 10y Bund.

Later in the domestic docket, the IFO Business Climate is due in Germany followed by final inflation figures in Italy. Across the Atlantic, housing data is due in the first turn followed by the CB’s Consumer Confidence and flash readings for the Manufacturing and Services PMIs.

What to look for around EUR

EUR/USD continues to look to the geopolitical scenario and the risk appetite trends for near-term direction. On this, further deterioration of the Russia-Ukraine front should keep the pair under pressure via a stronger dollar. In the meantime, the improvement in the pair’s outlook appears underpinned by fresh speculation of a potential interest rate hike by the ECB at some point by year end, higher German yields, persevering elevated inflation and a decent pace of the economic activity and other key fundamentals in the region. The threat to this view, as usual, comes from the Fed and a potential tighter-than-expected start of the normalization of its monetary conditions.

Key events in the euro area this week: Germany, EMU Flash PMIs (Monday) – Germany IFO survey (Tuesday) – Germany GfK Consumer Confidence, EMU Final January CPI (Wednesday) – Eurogroup Meeting, Germany Final Q4 GDP, EMU Final Consumer Confidence, ECB Lagarde (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. Speculation of ECB tightening/tapering later in the year. Presidential elections in France in April. Geopolitical concerns from the Russia-Ukraine conflict.

EUR/USD levels to watch

So far, spot is losing 0.09% at 1.1297 and faces the next up barrier at 1.1395 (weekly high Feb.16) followed by 1.1487 (200-week SMA) and finally 1.1494 (2022 high Feb.10). On the other hand, a drop below 1.1287 (weekly low Feb.22) would target 1.1279 (weekly low Feb.14) en route to 1.1186 (monthly low Nov.24 2021).