EUR/USD surges towards 1.1100 on positive Russo-Ukraine updates, Eurozone bond yields melt-up

• Positive Russo-Ukraine updates and Eurozone bond yield upside has propelled EUR/USD towards 1.1100 and to more than one-week highs.
• The pair’s technical momentum has shifted after earlier breaching the 21DMA for the first time in weeks.

A barrage of positive newsflow/developments regarding the Russo-Ukraine war and peace talks has seen EUR/USD in recent trade extend on what was already healthy gains on the session, with the pair making further progress towards 1.1100. At current levels in the 1.1090s, where the pair is trading at more than one-week highs and with gains of about 1.0% on the session, the bulls are eyeing a test of mid-month highs in the 1.1120s-30s area. Even prior to recent positive headlines, EUR/USD’s rally on Tuesday was already significant from a technical standpoint, with the pair successfully breaking to the north of its 21-Day Moving Average, which currently resides at around 1.1005, for the first time since February.

With the latest commentary from both Russian and Ukrainian negotiators in wake of now concluded Tuesday peace talks alluding to progress and a potential Presidential meeting and Russia announcing a scaling back of military activities around northern Ukrainian cities in order to foster more constructive conditions for talks, further EUR/USD upside may well be in store. A break above the psychologically important 1.1100 level and recent highs would open the door for a run towards the 50DMA in the 1.1180s.

Another factor aiding the run higher in EUR/USD is what is looking more and more like a melt-up in Eurozone bond yields. German 2-year yields, up more than 10bps on the day (much more than the 4bps rise in US 2-year yields) are eyeing a break above the key 0.0% level for the first time since 2015. Bond market participants are testing the ECB’s guidance (which hints toward rate hikes starting in Q4 this year) as money markets up their ECB tightening bets. Eurozone short-term interest rate markets now price 67bps of ECB tightening before the year’s end, up 7bps on the day.

Focus is likely to remain on EUR-sensitive themes like the Russo-Ukraine war and Eurozone bond yields for the remainder of the week. If positive momentum in talks continues and this week’s preliminary Eurozone inflation figures surprise to the upside, sparking further Eurozone yield upside, this might be enough to distract EUR/USD from the barrage of upcoming US data releases. For reference, these include JOLTS later on Tuesday, ADP jobs on Wednesday, Core PCE on Thursday and the official jobs report plus ISM Manufacturing PMI on Friday.