The euro has been under pressure since the beginning of March. The current situation in the world aggravates its situation. The policy difference between the Federal Reserve and the European Central Bank is of great importance, given the current crisis, which affects the US and European economies differently, the gap in the monetary exchange rate of both countries may become even wider.
The Fed will not stop at one rate hike, while the ECB's rhetoric still remains soft. There are suggestions that the ECB will also start tightening policy, but so far this is only at the level of individual statements and contradictory forecasts.
Be that as it may, the European currency will remain afloat for the foreseeable future. There is no one to take away the crown from the dollar yet either. Both currencies remain the most important reserve and transactional currencies in the world, accounting together for more than 80% of all reserves and more than 90% of all trades on the world currency markets.
The weak point of Europe, and hence the euro, will remain the topic of energy carriers. The exchange rate of the single currency will be under attack due to the energy crisis. Despite the efforts made by the EU, it will not be possible to quickly get away from Russian gas, it will take years.
The eurozone will need to establish large-scale supplies by sea, build additional gas liquefaction plants and storage terminals. High energy prices primarily increase logistics costs, as some European states have already warned. Packaging and plastics used for various kinds of goods and services are made from petroleum products. All this can accelerate the already record inflation.
In addition, Europe bought large volumes of agricultural products in Russia and Ukraine. This is another reason for accelerating price growth and slowing the economy.
Without the energy crisis, the prospects for the euro would look rosy, Commerzbank notes, but the realities are different now.
Sanctions against Russia limit the growth potential of the EUR/USD pair below 1.1100.
Meanwhile, French President Emmanuel Macron allowed the introduction of a new package of sanctions against Russia. The EU, he said, could move forward in discussing the issue of imposing an embargo on the supply of Russian oil and coal. Europe should discuss new restrictions against Russia in the coming days.
More sanctions means an increased risk of power outages. In the United States, of course, the situation with the imposition of sanctions is fundamentally different. Americans can largely provide themselves with electricity.
However, support for the euro may still come from the ECB, which may end the period of permanently negative interest rates in the next few months. There is a little more than a week left before the next meeting of the central bank – the meeting will be held on April 14. While traders will study the minutes of the March meeting, the publication of which will take place this week. Recall that last month the central bank managed to surprise the market by announcing the acceleration of its plans to cancel stimulus measures.
March inflation in the eurozone reached a new record high of 7.5%, which increased pressure on the ECB to take measures to curb inflation, despite the slowdown in economic growth.
EUR/USD traders will also focus on the minutes of the March Fed meeting. Markets will receive an update on Wednesday on how officials view the prospects for monetary policy. The minutes may also contain more detailed information about plans to reduce the central bank's balance sheet worth $9 trillion.
Several Fed representatives will speak during the week, including Fed Governor Lael Brainard, Minneapolis Fed Governor Neil Kashkari, New York Fed Governor John Williams and St. Louis Fed Governor James Bullard.
On the deterioration of market sentiment, the euro will retreat to 1.1000 and below. If the EUR/USD rate falls below 1.1030, the pair may reach 1.1000. The next bearish target is 1.0960.
The intermediate resistance is marked at 1.1040, then at 1.1080 and 1.1100. The pair's decline potential looks the most likely.
