Despite the eurozone being the area that is the most economically exposed to the war in Ukraine, the European Central Bank (ECB) has become increasingly hawkish of late. While the ECB will trail the Federal Reserve, the potential for greater fiscal support in the eurozone in the second half of 2022 could support gains in the euro, economists at CIBC Capital Markets report.

EUR/USD retesting YTS lows at 1.0806 should be a short-lived story

“Extended ECB inertia allied to ongoing Ukraine-related uncertainties points towards risks of EUR/USD potentially retesting year-to-date lows at 1.0806. But that should be a short-lived story.”

“A patient ECB, and the potential for Euro area fiscal support, should support both economic conditions and the euro in the latter half of the year. A more tempered pace for the first year of Fed hikes relative to current market expectations should work in the same direction.”