EUR/USD dips back to low 1.1320s, eroding day’s gains with Putin to recognise breakaway East Ukraine regions

EUR/USD dipped sharply in recent trade, falling from around the 1.1340 area to under 1.1320 in a matter of minutes after the Kremlin confirmed that Russian President Vladimir Putin would sign a decree recognising the independence of separatist Ukrainian regions. Traders sold their euro and bought safe-haven US dollar amid concerns that official Russian recognition of the statehood of the Donetsk and Luhansk People’s Republics makes a military confrontation between Ukraine and Russia much more likely.

Russia and the breakaway regions located in Ukraine’s East may well now sign some sort of defense partnership. Given that the breakaway regions have been escalating the conflict with Ukraine’s military in recent days, that could see Russian forces dragged into the fray to directly engage the Ukrainian military in combat. Russian military action against Ukraine would almost certainly see NATO countries impose tough economic sanctions on Moscow, leaving the Russian-energy import-dependent Eurozone vulnerable to Russian countermeasures, hence the downside in the euro.

Hawkish Fed speak on Monday from FOMC member Michelle Bowman, who said it was too early to know if the US economy needs a 50bps rate hike in March, further adds to the case for a lower EUR/USD on Monday. At current levels around 1.1320, the pair has not eroded all of its earlier gains and is trading flat on the day, though has found some support in the form of last Friday’s lows in the 1.1310s. Looking ahead, geopolitics will remain in the driving seat and with things likely to escalate further, that suggests downside risks for EUR/USD. A break below last Friday’s lows would free up a run towards last week’s lows in the 1.1280 area.