EUR/USD to tank towards support at 1.05 with absence of progress in Ukraine – Scotiabank

EUR/USD has lost around 4% since the beginning of the Ukraine conflict to trade as low as 1.08. Economists at Scotiabank expect the world’s most popular currency pair to tick down towards the 1.05 mark in the coming days.

A close under the 1.10 mark for 2022 remains the most likely scenario

“The stark ECB-Fed monetary policy divergence and relatively sanguine US growth prospects vis-à-vis the Eurozone should weigh on the EUR/USD through the remainder of the year and a close under the 1.10 mark for 2022 remains the most likely scenario.”

“The ECB’s extended dovishness and the absence of a clear off-ramp for Russia to withdraw troops from Ukraine could see the EUR test its 2020 low in the coming weeks (if not days given the quickly evolving situation) toward support at 1.05; and erratic Russian leadership implies that we cannot rule out a test of parity in the coming weeks/months, although we think this is unlikely.”

“A resolution to the conflict may see the EUR rebound from depressed levels but we don’t anticipate a prompt removal of Russian sanctions. Persistently-elevated commodity prices (with a negative impact on economic growth) and lingering tensions should maintain dovish ECB settings.” 

The ECB’s chief economist Lane indicated last week that the war would shave 0.3-0.4ppts off growth in 2022; updated projections out on Thursday should reflect this scenario at least but policymakers’ central expectations could well shift to reflect an even greater economic cost and pressure the EUR.”