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- Hopes for diplomacy in Ukraine triggered aggressive short-covering on EUR/USD on Tuesday.
- Surging German bond yields further underpinned the euro and remained supportive of the move.
- The risk-on impulse, retreating US bond yields weighed on the USD and fueled the momentum.
The EUR/USD pair witnessed an aggressive short-covering move on Tuesday and rallied to a two-week high amid hopes for a breakthrough in the Russia-Ukraine peace negotiations. In the latest development, the Russian Defense Ministry promised to scale down military activity in Kyiv and Chernihiv to create conditions for dialogue. Adding to this, top Russian negotiator Vladimir Medinsky was quoted saying that there have been enough developments to hold a meeting between President Vladimir Putin and his Ukrainian counterpart Volodymyr Zelenskyy. The headlines fueled optimism about a diplomatic solution to end the war and provided a strong boost to the euro, which has been battered in recent weeks amid fears about the economic fallout from the Ukraine crisis.
The common currency was further underpinned by surging German government bond yields. The yield on two-year notes briefly moved above zero for the first time since late 2014 and the benchmark 10-year bund yield shot to levels last seen in 2018. The positive news flow surrounding the Russia-Ukrain saga raised expectations that the European Central Bank will scale back its ultra-loose monetary policy as soon as year-end to tame surging inflation. Apart from this, a broad-based US dollar weakness was seen as another factor that contributed to the pair's strong intraday positive move. The risk-on impulse, along with retreating US Treasury bond yields, dented demand for the safe-haven greenback and extended additional support to the major.
That said, rising bets for a 50 bps Fed rate hike at the next two meetings helped limit any deeper losses. Investors seem convinced that the Fed would adopt a more aggressive policy stance to combat stubbornly high inflation. This, in turn, acted as a headwind for the major and led to a late pullback of around 50 pips from the daily high. The pair, however, attracted fresh buying during the Asian session on Wednesday amid the prevalent bullish sentiment around the global equity markets. Market participants now look forward to the release of the prelim German consumer inflation figures for March. This, along with ECB President Christine Lagarde's speech should influence the shared currency and provide some impetus to the EUR/USD pair.
Later during the early North American session, traders will take cues from the US macro data – the ADP report on private-sector employment and the final Q4 GDP print. Apart from this, the US bond yields and the broader market risk sentiment, will drive demand for the greenback and allow traders to grab some short-term opportunities.
Technical outlook
From a technical perspective, the overnight strong move-up stalled near the 1.1135-40 region. The mentioned area nears the 50% Fibonacci level of the recent slump from the vicinity of the 1.1500 mark and should act as a pivotal point for trades. Sustained strength beyond will suggest that the pair has bottomed out in the near term and set the stage for a move towards reclaiming the 1.1200 mark. The momentum could further get extended towards testing the 1.1230 region, or the 61.8% Fibo. level.
On the flip side, the 38.2% Fibo. level, around the 1.1070 region, now seems to act as immediate strong support. A convincing break below would make the pair vulnerable to slide back towards testing the key 1.1000 psychological mark with some intermediate support near the 1.1025 area. The next relevant support is pegged near the 23.6% Fibo. level, around the 1.0975-1.0970 area, which if broken decisively would shift the bias back in favour of bearish traders. The pair might then accelerate the slide towards the 1.0900 mark before eventually dropping to the 1.0860 support en-route the YTD low, around the 1.0800 mark touched earlier this month.
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