EUR/USD pushes higher to 1.1230 as risk appetite improves as traders monitor geopolitical developments

• EUR/USD is trading in much calmer fashion this Friday near the 1.1200 level following Thursday’s massive 200 pip intra-day swing.
• Risk appetite has been on the front foot on Friday, helping push EUR/USD to session highs at 1.1230.
• As geopolitical uncertainty remains elevated and clouds the Fed/ECB policy outlook, EUR/USD may remain contained within 1.1100-1.1300 ranges.

Following Thursday’s extreme volatility that saw EUR/USD drop as much as 200 pips intra-day from above 1.1300 to multi-month lows near 1.1100 after FX markets were roiled by Russia’s decision to launch a full-scale invasion of Ukraine, trade has calmed. The pair has spent Friday’s session pivoting the 1.1200 level as FX market participants come to terms with the largest war in terms of scale in Europe since the end of the second world war. At present, the pair trades with gains of about 0.3% on the day in the 1.1220 area, having seen some strength in recent trade in tandem with improving risk appetite as Russia indicated it was ready for talks with Ukraine.

The Kremlin said it was ready to send a delegation to Minsk, which appears to have revived some minor hopes that a diplomatic solution could halt hostilities. Such hopes are likely unfounded against the backdrop of a further intensification of fighting in Ukraine, as Russian forces struggle to make progress against allegedly highly motivated Ukraine resistance. That suggests the scope for a lasting EUR/USD rebound may be limited for now, especially as the US and EU prepare further sanctions against Russia.

Russian President Vladimir Putin and Foreign Minister Lavrov will both see their European assets frozen in the EU, reports suggest, though for now, the Western response continues to be viewed as soft, given no sanctions yet target Russian energy exports. Another consideration for EUR/USD traders is the implication the war in Ukraine will have on the ECB and Fed policy outlook. So far the market’s view regarding the Fed is that a 50bps hike in March is now less likely. But there appears to be more confusion about how events will impact the ECB.

ECB Chief Economist Philip Lane outlined various scenarios in public remarks on Friday and in all he sees the conflict weakening Eurozone growth and pushing higher inflation. “It seems likely that the ECB will revise its inflation forecast upwards,” said one analyst, concluding that “we may still get an accelerated tapering, as long as the conflict stays within Ukraine”. For now, as uncertainty remains elevated on multiple fronts, EUR/USD may continue to trade within 1.1100-1.1300 ranges.