How to position for building EURUSD downside risks

It was the catalyst for the ECB to become the last G3 central bank to execute a hawkish pivot. The ECB is now forecast to end QE by mid-year and raise rates by 50bp this year.

As we wrote about in our article on the Dax last week, the prospect of a zero or possibly even a positive deposit rate propelled the share price of German banking giants Deutsche Bank and Commerzbank higher. In theory, it should also have been supportive of the EURUSD, and for a few days, it was.

Until a higher than expected U.S. inflation print skewed the risks towards further Federal Reserve tightening, starting with a better than even chance of 50bp rate hike next month. Followed by reports that Russia could invade Ukraine as early as this week.

Technically, the rejection from last week’s 1.1495 high has seen the EURUSD return to the well-trodden ground, its former range between 1.1380 and 1.1180, with downside risks. 

Whether it be from a rates differential perspective, the possibility of a war on the doorsteps of Western Europe, or from a technical perspective, the EURUSD is not the place to be right now.

Therefore, the preference is to sell bounces in the EURUSD back to resistance at 1.1360/80 with a stop loss placed at 1.1510. Presuming the trade entry is achieved, the target for the trade is initially the recent 1.1120 low, followed by a move to 1.1050.

Source Tradingview. The figures stated areas of February 14th, 2022. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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