Best day in 5-years for EUR/USD ahead of the March ECB meeting

It’s been a turbulent ride for euro traders, having fallen beneath 1.0800 to a fresh 22-month low then enjoying its most bullish day in over five years. And that’s just the past 24 hours, ahead of today’s ECB meeting. The catalyst for the rally is seemingly Ukraine’s openness to ‘neutrality’, which is a key demand from Russia to end the war. And with Europe being a bit too close to the action, European markets are clearly sensitive to headlines surrounding the Ukraine crisis, both good and bad. The DAX rallied over 8% and the euro saw widespread gains against other currencies.

What does this mean for today’s ECB meeting?

Perhaps the exchange rate (that they supposedly don’t focus on…) becomes a focus once more, or they simply use it as a reason to tread even more carefully than they already are. And that could mean not mentioning a specific end date for their asset purchases and / or opting for a lower pace of tapering.

But we should expect a warning of inflation, given the rapid rise in commodities since Russia’s invasion of Ukraine. Yet without wanting that to sound hawkish, they could hint at not hikes before 2023. Ultimately, a cautious tone was always expected from the ECB today, given the circumstances surrounding Ukraine. And we doubt yesterday’s rally will change that as the situation is still very much evolving, which leaves the euro open to large moves from headline risk.

US inflation could be a moot (data) point

The US also release inflation date but it is unlikely to be much of a market mover. The Fed have all but confirmed a hike at next weeks meeting and, even if CPI is to soften today, it would be hard to take too seriously given the meteoric rise in commodities.

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