Geopolitical tensions weigh on the euro, even though more persistent inflation pressures are shifting European Central Bank (ECB) rhetoric. In the view of economists at Westpac, EUR/USD risks testing range support at 1.11.

Events in Ukraine continue to dominate markets in Europe

“The counter impact of the geopolitical tension on rates is that the imposing of sanctions and restrictions on use of Russian gas and resources is likely to sustain the recent rise in inflation pressures.”

“This week has seen further evidence of widening views within ECB. Austria’s Holzman said the extent of inflation pressures could trigger two rates cuts into end-2022 while France’s Villeroy continued to point to the ECB’s policy optionality and gradualism. Prospects for a more marked change in policy may be clouded by events in Ukraine, but are still going to be critical for the direction of EUR into mid-2022.”

“Russia’s attack today produced a clear break of 1.1300, likely lowering EUR range from 1.13-1.16 to 1.11-1.14 ahead of the 10th March ECB meeting.”