The euro, like most other European currencies, has been negatively affected by the geographical and commodity-related exposure to the Russia-Ukraine conflict. We struggle to see a near-term recovery in EUR/USD in the current market environment.
When it comes to the ECB impact, we think markets have already priced in a cautious tone by President Christine Lagarde this week, and we do not expect a material negative impact on the EUR after the policy announcement.
It will be interesting to see whether the ECB once again talks about “monitoring” the exchange rate, which it has not mentioned in recent statements. We doubt this could have a tangible impact on the euro on Thursday, but it could introduce the notion that the ECB may consider measures to support the currency should it fall further, in an attempt to mitigate the drag generated by high energy prices.
In the near term, geopolitics and commodity swings are set to remain the main driver for EUR/USD and any post-ECB impact may be quickly overshadowed. Russia’s threat to stop the gas supply to Europe is currently adding to the downside risks that the euro is facing due to its proximity to the conflict and already elevated commodity prices.
EUR/USD is not screamingly undervalued at the moment (around 0.5% according to our shortterm fair-value model), as its drop has been largely warranted by the US-eurozone divergence in short-term rates and equity performance (in the last month: S&P500 is off 7%, Eurostoxx 50 is off 15%), as well as worsening risk sentiment.
This means that there is more room for markets to price in a risk premium linked to a supply shock in energy markets in the eurozone, and a move to the 1.0640, 2020 lows, is a possibility in the near term
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