The US dollar is asserting strength against its rivals despite short-term rollbacks. The euro is also trying to gain momentum. However, it hits the bottom from time to time. To this end, the Eurodollar pair is unable to pick up a clear-cut trend.
The euro weakened significantly amid geopolitical tensions. It is trying to consolidate at the current levels. The euro also gave in to the US dollar, trying with a bearish bias. Since last week, the single currency has been reaching the lows of May 2020. At that time, the EUR/USD pair was trading near 1.1100.
Market sentiment has turned sour due to the escalation of the Russia-Ukraine conflict and the negative consequences. Analysts fear stagflation in the global economy. This is why the Fed needs to raise the interest rate. Western countries imposed tough sanctions against Russia. However, economists are worried that they may backfire.
Sanctions introduced by several states after the escalation of the geopolitical conflict could market the euro block economy more vulnerable. The reasons for this is long-term trade cooperation with Russia and strong dependence on energy exports. If the parties fail to tech an agreement, the EU countries will face a surge in inflation. Thus, inflation may turn into stagflation. If this scenario comes true, it will adversely affect consumer spending in the eurozone. GDP is likely to shrink by 0.5%.
The euro is now trading flat due to the current situation. On February 3, it hovered near a 21-month low amid fears that the crisis in Ukraine will harm the economic growth of the eurozone. The euro/dollar pair plunged to 1.1100. Analysts believe that the euro may decline to 1.1000. The target level is located at 1.1080. There is a high chance of the resumption of a downward movement if bulls fail to protect this level. On March 3, the EUR/USD pair was near 1.1105, starting in a downward spiral.
Forex strategists expect a strengthening of the US currency and a further decline in the euro. At the same time, the US dollar has been rising as a safe-haven asset. They assume that before a drop, the euro may rise above 1.1105. Shortly after, it is forecast to slide down. If the pair breaks through the 1.1080 level, it will open the way to 1.1000. Apart from that, the Russian-Ukrainian conflict is likely to have a stronger impact on the eurozone economy than on the US one. Hence, bears keep control of the EUR/USD pair for a long time until the parties reach a compromise.
The US currency will also benefit from a rate hike. Market participants are waiting for hints from Jerome Powell. The likelihood of a rate increase by 50 basis points is quite low because of the current geopolitical uncertainty. However, analysts are betting on a rate hike by 25 basis points at least four times this year.
Jerome Powell also noted that despite economic and geopolitical headwinds, the greenback remains strong. He believes that nothing will shake the position of the US dollar as a reserve currency, including rising inflation. Powell is also confident that the US currency is the best long-term option.
The greenback was also supported by positive macro statistics. According to the ADP report, in February, the economy added 475,000 new jobs versus the forecast reading of 388,000. a strong ADP report indicates the revival of the US labor market. Judging by the economic reports, the Fed's decisions to tighten monetary policy will not harm the economy.