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Monthly Wrap – EUR – Euro volatile amid ECB shift in tone and Russia-Ukraine tensions

Philip McHugh February 21st 2022 - 2 minute read

By Philip McHugh on February 21, 2022

Key takeaways:

  • Euro surges as ECB hints at more hawkish approach
  • Russia-Ukraine crisis and dovish ECB comments undermine EUR
  • EUR monthly lows: £0.83, $1.11, AU$1.56, NZ$1.66, C$1.41
  • EUR monthly highs: £0.85, $1.15, AU$1.62, NZ$1.73, C$1.46

The euro wavered in the middle of January as upbeat German economic data was offset by dovish comments from European Central Bank (ECB) President Christine Lagarde.

A similar pattern was repeated the following week. Initially, the single currency climbed after Germany’s manufacturing and services PMIs unexpectedly improved.

However, following the Federal Reserve’s hawkish hold, EUR fell. With the Fed signalling it would raise rates in March, the Euro faced the twofold pressure of central bank policy divergence and its negative correlation to a strengthening US dollar.

The single currency experienced some volatility around the ECB interest rate decision in early February. Ahead of the central bank’s meeting, Eurozone inflation unexpectedly rose.

The ECB left policy unchanged, as expected. But in the following press conference, Lagarde did not repeat her view that a 2022 rate hike is unlikely. Instead, she said decisions would be data dependent.

Markets took this subtle shift in tone as an indication that the ECB may start tightening monetary policy as soon as March, propelling the euro up from multi-month lows.

The next week, Lagarde seemingly tried to rein in rate hike bets. In a number of speeches the ECB President made familiarly dovish remarks, causing the euro to relinquish some of its gains.

Fears that Russia would invade Ukraine also weighed on EUR as Russian forces amassed on the two countries’ shared border. As the threat of an imminent invasion eased, EUR edged back up, although tensions remain fraught.

Looking ahead, the Russia-Ukraine crisis could continue to be a dominant influence on EUR exchange rates. If the situation de-escalates, the euro could rise. But if tension flare again, it could put pressure on the single currency.

The Eurozone’s CPI for February will also be a key event for the euro. Another rise in inflation would fuel speculation that the ECB will tighten policy. If this happens, EUR could climb.

Written by
Philip McHugh

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