EUR/USD offered on Ukraine crisis risks and expectations of rapid-fire from the Fed

• EUR/USD bears take control due to a firmer US dollar and Ukraine crisis risks. 
• Investors are buying into the greenback and the long position in building ahead of the Fed.

The US dollar is robust at the start of the week, with the DXY higher on the day so far by nearly 0.5% and for three straight sessions. US yields are firmer due to the narrative surrounding the Federal reserve and as civilian killings in north Ukraine keep the safe-haven appeal alive in financial markets. In turn, the euro is on the backfoot and weighed also by the prospect of increased sanctions.

At the time of writing, EUR/USD is trading lower by 0.7% and some change after falling from a high of 1.1054 to a low of 1.0960. The euro is trapped between mixed sentiment surrounding the path of the European Central bank, Ukraine crisis risks to the economy and runaway inflation in the US which, for now at least, is supporting demand for the greenback.

ECB President Lagarde heavily caveated the central bank’s hawkish policy outlook in March, though speculation of ECB rate hikes has since stepped up on the back of rising inflation pressures in the Eurozone as well. However,  traders are concerned that French President Emmanuel Macron has called for new sanctions and said there were clear indications Russian forces had committed war crimes in the town of Bucha. The German Defence Minister Christine Lambrecht also advocated for much of the same, saying that the European Union should discuss ending Russian gas imports. Russia supplies some 40% of Europe's gas needs. In this regard, markets will also be closely watching the price of oil and its implications for EZ inflation.

Ulrich Leuchtmann, Commerzbank Head of FX. argued that, "More sanctions of course also mean that the risk of energy disruptions in Europe rises, because of our own sanctions or because Russia might get completely serious with its counter-sanctions rather than just changing the payment mode for natural gas."

The ECB minutes for further insight into the impact of war on growth and inflation. ''While the information set at the time of the last ECB meeting (2 weeks after Russia's invasion of Ukraine) will be somewhat stale, the Minutes are likely to reveal details about the change to forward guidance, alongside the Governing Council's view on rapidly-rising inflation and how best to tackle it,'' analysts at TD Securities said. 

Meanwhile, the US data on Friday showed US Unemployment hit a two-year low of 3.6% last month. This was leading investors to assess if the numbers would force the hand o the Fed, in anticipation of rapid-fire from the central bank in order to tackle inflation by lifting rates sharply. Subsequently, the two-year US yields hit 2.4950%, their highest level since March 2019.

However, while the US dollar is firmer as a consequence, it is still not breaking out of the 2022 highs at 99.41.  The latest CFTC data suggest the market has been rebuilding its long dollar position which could be why the greenback is unable to really take off in the spot market. The market is already oversubscribed to the greenback. Speculators' net long bets on the dollar rose to an 11-week high in the latest week as Fed funds futures price in an 80% chance of a 50 basis point hike next month.