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EUR/USD. Preview of the week. Geopolitical Signals and the PCE Index

Relevance up to 12:00 2022-03-28 UTC–4

The euro-dollar pair completed the last trading week at 1.0961, that is, at the lower boundary of the 1.0960-1.1050 range, within which it has been for the past few days. Against the backdrop of high-profile geopolitical events, macroeconomic reports faded into the background: traders reacted to them only formally, thus emphasizing the priority of external fundamental factors. It is safe to say that nothing will change in this regard in the medium term: geopolitics will continue to “steer” the situation, determining the vector of movement of the US currency. In turn, the euro will continue to move in the wake of the greenback, as it did not have its own arguments to turn the tide.

Last week, market participants were focused on the NATO summit, where Poland’s proposal to introduce a “peacekeeping contingent of the North Atlantic Alliance” into the territory of Ukraine was discussed. This offer was rejected, thanks to which EUR/USD bulls were able to approach the upper limit of the price range. This topic can be considered closed, so this week traders will probably focus on other fundamental factors – also of a geopolitical nature.

Firstly, it is the ongoing negotiation process between Russia and Ukraine. On the one hand, traders “bit by bit” collect information about the success/non-success of the interstate dialogue. The information vacuum that has formed around this process plays on the dollar’s side. Due to the lack of any visible progress, the general concern of traders is growing. Moreover, the rare comments of the parties suggest that the delegations are still far from reaching a compromise and comprehensive agreement. For example, on Friday, the head of the Russian delegation at the talks, Vladimir Medinsky, said that the positions of Russia and Ukraine “are converging on minor issues, but on the main ones they are marking time.” After these words, the EUR/USD pair sank again, ending the trading week within the 9th figure.

And yet – negotiations are continuing, and the very fact that the pair manages to be kept “afloat” keeps it from falling into the area of annual lows. Moreover, following the results of today’s meeting online the parties decided to hold the next round of negotiations in the “offline” mode. According to the head of the Ukrainian delegation, the meeting will take place in Turkey, in the period from March 28 to March 30. The head of the Russian delegation also confirmed that the next round of negotiations will be held in person on March 29 (although he did not specify where exactly).

Despite the fact that there are no other details about the upcoming meeting (yet), the very fact that this event has been announced may put pressure on the safe dollar – the EUR/USD pair has every chance to return to the area of the 10th figure, having been designated at the upper limit of the 1.0960-1.1050 price range.

If not for one “but”.

The fact is that next week traders may focus their attention on another geopolitical factor, which is hypothetically “explosive”. We are talking about Nagorno-Karabakh. The recent events that took place during the weekend (that is, the market has not yet had the opportunity to react to them) may become an occasion for strengthening anti-risk sentiment in the foreign exchange market.

If we talk about the macroeconomic reports of the coming week, the most important release is expected on Friday, when the main index of personal consumption expenditures (PCE) will be published. This is the most important inflation indicator that is monitored by members of the Federal Reserve and which can provoke increased volatility among dollar pairs – both in favor of the greenback and against it. According to preliminary forecasts, Friday’s report will reflect a further increase in inflation in the United States. Let me remind you that a month ago, this index once again demonstrated positive dynamics: in annual terms, the indicator increased in January to 5.2%. This is the strongest growth rate since 1989. The February result should surpass the January one: according to most experts, the index will reach 5.5% (y/y). All this will indicate a strong increase in consumer spending against the background of limited supply. De facto, Americans are actively spending their accumulated funds, thereby accelerating inflation and indirectly strengthening the hawkish position of the Fed. The dollar will receive significant support if the report released on Friday is at the forecast level.

But in general, the fate of the EUR/USD pair depends on geopolitical factors. If the negotiations between Russia and Ukraine get off the ground, and the situation around Nagorno-Karabakh does not escalate, the greenback will be under pressure due to a decrease in the level of anti-risk sentiment. If the situation develops in a mirror image, EUR/USD bears will try to push through the support level of 1.0960 in order to go to the base of the ninth figure and test the support level of 1.0900. Unfortunately, it is impossible to predict or predict the dynamics of the development of geopolitical events. Therefore, both short and long positions look risky at the moment. At the same time, if the events are not extraordinary (failure of negotiations, or vice versa – a breakthrough), EUR/USD traders will continue to trade within the 1.0960-1.1050 range. In such conditions, it is most expedient to take a wait-and-see position, or to open trading orders from the borders of the above echelon – in the event that, when approaching its borders, the momentum will gradually fade.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

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