The negative impact will be primarily felt via much higher oil and gas prices, with Russia being the main supplier for most EU countries. This trade relationship is now seriously disrupted and may soon completely cease (or sanctioned as they called it) if the EU decides to stop buying Russian oil/gas or Russia decides to stop supplying.

In addition, fears that the war could get even worse as other European countries may be drawn into the war over time - or NATO eventually getting directly involved - is pressing the EUR further. This is not something that the markets expect to happen, but it is certainly the biggest fear in the back of everyone’s mind.

Heavy reliance on Russian oil and natural gas means that Europeans will feel the negative impact of high prices much more than other Western countries which are energy independent (e.g., US, Canada, Australia). Such a major negative shock for the already decelerating Eurozone economy means that the ECB will have to keep monetary stimulus for longer. Indeed, already this week, expectations for ECB rate hikes have fallen massively compared to last week (before Russia’s invasion), and this now means that the EUR is (again) pinned as the currency with the most dovish central bank.

In contrast, the Fed is set to raise rates at their meeting in two weeks (March 16). Fed Chairman Powell confirmed this in his two-day testimony before Congress on Wednesday and yesterday. Powell also said he will support a larger 50bp rate hike at later meetings this year if appropriate. The Bank of Canada also raised rates yesterday, supporting the commodity-linked CAD dollar, in addition to surging commodity prices. Australia and New Zealand dollars are also benefiting from high commodity prices, hence we are seeing strong downtrends on EURAUD and EURNZD currency pairs.

All of the above means that EURUSD falling toward the 1.0650 Covid lows or below (e.g., 1.05) is now a much more realistic scenario than it was one week ago. We are already seeing it trading below 1.10 as the Russia-Ukraine war intensifies by the day. Unfortunately, there is no sign the fighting will stop or that relationships between Russia and the West will improve anytime soon. 

Strong bearish momentum has developed on several EUR pairs, including EURUSD. Therefore, it seems best to trend-trade these EUR pairs and look to join the moves down. For example, we can use indicators such as the GMMA, moving averages, or Fibonacci retracements to determine entry points on retracements.

Currently, the EURUSD downtrend is entering oversold territory as the bearish move accelerated following a break below 1.10 earlier today. Some correction seems overdue, though, given the current strong bearish dynamics, it’s also possible that we won’t see one.

However, if a correction comes, the 1.10 level could be the important one that gets retested again. This would be an optimal technical zone for fresh short entries. As the chart below shows, the GMMA indicator (blue lines) also points to this zone as a potential retracement area.

Finally, note that things are developing quickly, and the further EURUSD falls, the lower the next retracement will be. So, in this regard, we may need to join the trend below 1.10, if say the potential correction doesn’t go as high as 1.10. 

This is why moving averages and indicators based on moving averages (such as the GMMA) are particularly effective at trading strong trends like this one. As the moving averages follow the price lower, we get potential retracement entry points and stop-out levels that are moving lower too.