EUR/USD remains on the defensive and challenges 1.1200

The selling bias around the single currency remains well and sound and now motivates EUR/USD to recede from earlier tops near 1.1230 to the sub-1.1200 region on turnaround Tuesday.

EUR/USD weighed down by geopolitics

EUR/USD resumes the downside and now adds to Monday’s losses around the 1.1200 neighbourhood after the Russian offensive is expected to continue until its target is achieved, said Russia’s Defence Minister. His comments encouraged the re-emergence of the risk aversion among traders and put the risk complex under extra pressure in the first half of the week.

Indeed, inflows to the safe haven universe remain pretty much unchanged on the back of the fragile geopolitical environment and after initial Russia-Ukraine talks in Belarus on Monday only yielded the promise of further dialogue in the near future.

In the meantime, the spot is expected to remain under scrutiny for as long as the military conflict in Ukraine lasts, always tracking the risk aversion sentiment as well as safe-haven (dollar) dynamics.

Closer to home, Germany advanced CPI will be the salient event later in the European afternoon, while the ISM Manufacturing takes centre stage across the pond later in the NA session. Earlier in the session, the final Manufacturing PMI in Germany came at 58.4 and 58.2 when it comes to the broader Euroland.

What to look for around EUR

EUR/USD continues to look to the geopolitical scenario and risk appetite trends for near-term direction. On this, the recent deterioration of the Russia-Ukraine front is expected to keep the pair under pressure amidst solid risk-off sentiment and demand for the greenback. In the meantime, bouts of strength in the pair should remain underpinned by speculation of a potential interest rate hike by the ECB probably sooner than many anticipate, higher German yields, persevering elevated inflation and a decent pace of the economic activity and auspicious results from key fundamentals in the region. The threat to this view, as usual, comes from the Fed and a potential tighter-than-expected start of the normalization of its monetary conditions.

Key events in the euro area this week: Germany, EMU Final Manufacturing PMI, Germany Flash CPI (Tuesday) – Germany Retail Sales, Unemployment Change, Unemployment Rate, EMU Flash CPI (Wednesday) – Germany/EMU Services PMI, EMU Unemployment Rate, ECB Accounts (Thursday) – Germany Trade Balance, EMU Retail Sales (Friday).

Eminent issues on the back boiler: Asymmetric economic recovery post-pandemic in the euro area. Speculation of ECB tightening/tapering later in the year. Presidential elections in France in April. Geopolitical concerns from the Russia-Ukraine conflict.

EUR/USD levels to watch

So far, spot is losing 0.34% at 1.1180 and faces the next up barrier at 1.1322 (55-day SMA) followed by 1.1390 (weekly high Feb.21) and finally 1.1395 (weekly high Feb.16). On the other hand, a drop below 1.1118 (low Feb.28) would target 1.1106 (2022 low Feb.24) en route to 1.1100 (round level).