The economic and political costs of eliminating dependency on Russian energy are likely to weigh on EU growth and EUR into 2H 2022. Economists at Westpac expect the EUR/USD pair to slide towards 2017 lows of 1.0350/40.

More prolonged conflict in Ukraine would again weigh on EU activity

“The growing guidance towards dealing with the likelihood of inflation now being close to or above target through their forecast period clearly warrants the withdrawal of accommodative policy. Therefore there has been a unified call to end QE in June and start raising rates from current NIRP as early in Q3 as data allows, most likely in July.”

“The key problem for ECB is the risk of escalation of the conflict in Ukraine and the risk of a sudden end to energy supplies from Russia. These pressures are also at risk of dividing the current unified stance of EU. This may mean a less forthright EU stance and, as seems to be Russia’s intent now, more prolonged conflict in Ukraine which would again weigh on EU activity.”

“The lack of key timely data in the coming week will leave EUR at risk of further declines to retest 1.0340/50 (2017 lows) if not the 1.0200-50 area.”