FX Update: First signs of euro resilience?

FX Trading focus: Euro still weak, but diminishing returns for bears on fresh developments?

A new blast higher in crude oil prices hit markets out of the starting blocks overnight after the weekend apparently saw US Secretary of State Antony Blinken discussing a ban on Russian crude oil imports with European allies and Japanese sources spoke of similar talks. Self-sanctioning has already rapidly outpaced the level of official. The usual European and peripheral currency suspects that have been bearing the brunt of the impact from the backdrop continued lower today. However...

After lunch-time in Europe today, a Kremlin spokesman issued a statement indicating that Russia could cease military operations quickly if Ukraine would agree to recognize Crimea as Russian and the two eastern breakaway regions of Ukraine as independent countries, but also only if Ukraine agreed to amend its constitution and not join NATO or the EU, etc… It seemed to generate market interest and a bounce in market sentiment, even if it doesn’t look like a major change of Russian position. Regardless, the euro rebounded solidly to above 1.0900 before dropping back a bit as of this writing after nearly trading to 1.0800 less than an hour before. It may be too early to read anything into this, but the price action looks a bit less dire here, especially relative to the energy in other markets. Let’s hope the market is on to something. If so, a careful way to trade remains long call spread strategies in EURUSD for example – perhaps 1- or 2-months out (the call spread approach lowers the price at which the position becomes profitable even if it caps overall upside potential). If something more promising develops – a proper ceasefire to start, hopefully a Russian pull-back to follow, etc., the turning of the tables could prove incredible steep and decisive. Pointing this out just to remind readers how far these trades have stretched and the scale of the potential for rapid mean reversion under the right circumstances – it is not a prediction that we are set for an improvement in the situation on the ground in Ukraine, even if we ardently hope that is what we’ll get.

Chart: EURUSD
Expectations for the ECB meeting have shifted radically since the Russian invasion of Ukraine, as we expectations that the bank was set to announce a major overhaul of its guidance were wiped away when Russian troops invaded. Instead, we are likely to get an ECB that will delay its QT plans and issue far more “conditional” guidance on the inflation outlook that will depend on a drastically changed geopolitical and energy/power price situation. Still, the bank could surprise expectations with some far higher longer term inflation forecasts that, despite conditional guidance would likely accentuate the reaction function to any (hopefully) positive Ukraine-linked headlines. Technicals are far less relevant than headlines here, but a proper recovery indicator would require the price action to vault all the way back up in the 1.1200+ area.