EUR/USD : FUNDAMENTAL NEWS + PRICE ACTION FORECAST | SHORT SETUP

EUR/USD takes a respite at the edge of 1.08 the figure, traders are watching oil prices.

EUR/USD now depends on where the price of oil goes next.
The Fed and ECB divergence is priced in but the ECB will be a key event this week.
EUR/USD is down some 0.45% on the day but the euro is attempting to recover in an accumulation of the latest daily bearish sell-off. EUR/USD positioning inched higher in the week ending 1 March, despite mounting pressure on European currencies on the back of the Russia-Ukraine conflict. However, a long squeeze of those positions would be expected in the next report, underlying the potential longevity of weakness in the euro for the foreseeable future.

The Russian invasion of Ukraine and questions about Europe’s energy security will be a key theme for the European Central Bank this week as the war in Ukraine has made the economic outlook for the eurozone extremely uncertain. No changes are to be expected at the meeting, although some would have expected them a few weeks ago.

The economic implications for the eurozone due to the war will require the ECB to maintain maximum flexibility for its road to normalisation. There may be mention that should everything goes well, net asset purchases can still end in the third quarter. With that being said, there is no telling what the road ahead will be like in what is a very fluid situation. The divergence between the ECB and Federal Reserve is favouring the greenback which leaves 1.0800 vulnerable.

The week is absent of Fed speakers due to the media embargo ahead of next week’s FOMC meeting, but the market is fully priced for a 25 bp hike on March 16 as the start of the tightening cycle. ''Looking ahead, 150 bp of tightening is priced in over the next 12 months, followed by another 25 bp in the following 12 months that would see the Fed Funds rate peak near 1.75%,'' analysts at Brown Brothers Harriman said.

''We continue to believe that the terminal rate will have to be much higher than this, but the Ukraine crisis has pushed Fed tightening expectations lower. January consumer credit is the only US data report today and is expected at $24.5 bln vs. $18.9 bln in December.''

Euro traders are glued to the price of oil
Meanwhile, markets are fixated on the price of oil which is a driver for risk in the forex space and the euro has been suffering for it given the eurozone dependency on Russian oil, coal & gas. However, the EU has agreed to phase out dependency on Russian energy according to an EU draft statement from a summit. The Biden administration is also willing to move ahead with a ban on Russian oil imports into the United States even without the participation of allies in Europe. US oil is currently trading at $120bbls.

The consensus is that the higher prices pose less threat to the Us than it does to the Eurozone. While Russian crude represents only 3% of domestic energy imports, for Europe, Russia is a key provider. Russia provides 25% of the EU's crude and 40% of its natural gas.