FX.co ★ EUR/USD. US dollar is fluctuating amid geopolitical risks

The EUR/USD pair finally got stuck in a flat. During the past two weeks, the price showed increased volatility – the pair initially declined to a one-and-a-half-year low of 1.1121 and then soared to the borders of 1.15. However, the parties calmed down this week and settled on a "neutral zone", that is, within the 1.13 area. The activity of traders has noticeably decreased, and the range of price fluctuations has narrowed to a 50-point range. Recently, market participants only formally reacted to macroeconomic releases, and in most cases, they simply ignored the published reports, due to their secondary nature. In particular, traders ignored the publication of US retail sales and the minutes of the last Fed meeting.

Contradictory comments from Fed members also failed to determine the direction of the EUR/USD movement: James Bullard, who has the right to vote this year, continues to insist on an aggressive pace of rate hikes (by 100 basis points until July). He was indirectly supported by Loretta Mester, while some of their other colleagues doubt that the Fed should do this. For example, the head of the Fed Bank of Minneapolis, Neel Kashkari (without the right to vote this year), said that the regulator could overdo it in terms of tightening monetary policy. He believes that if the Fed raises rates too aggressively, there is a risk that the US economy could be sent into recession. A similar position was voiced by Esther George (voting) and Mary Daly (no voting).

The voiced doubts certainly put background pressure on the US dollar, although its devaluation was limited. First, many other Fed representatives who have the right to vote and/or have political weight in the Committee did not indicate their position. In particular, the members of the Board of Governors (including Jerome Powell), and one of the most influential officials of the Central Bank, the head of the New York Fed, John Williams, keep silent. Secondly, much will depend on the dynamics of February inflation. The next inflation report will be published before the March meeting, so this release may strengthen (or weaken) the regulator's hawkish mood. Therefore, the US currency reacted quite weakly to the restrained comments of some Fed representatives.

At the same time, USD bulls ignored the main macroeconomic reports that were published this week. For example, US retail trade figures came out in the "green zone": the main component of the release, as well as the component excluding car sales, showed the best result since March last year. Traders also ignored the producer price index (PPI), which is an early signal of changes in inflationary trends. The overall index increased to 1.0% against the expected growth of 0.5% in monthly terms. This is the best result since July last year. As for the annual terms, the indicator rose to 9.7%. The core producer price index, excluding food and energy prices, also turned out to be in the "green zone" both on annual and monthly terms.

The disregard of the above-mentioned releases, which are quite important, suggests that traders have focused on the "geopolitical conflict" around Ukraine. On the one hand, the first signs of de-escalation of the situation appeared this week: troops residing in the Ukrainian borders had already withdrawn, and the invasion reported by the American media did not take place. On the other hand, there has been a serious aggravation recently in the Donbas, which looks quite threatening in the medium term.

In addition, the Western media continues to insist that the invasion will start soon. At the same time, the UK Department of Defense even published a map of the "invasion" of Ukraine yesterday. Nevertheless, the Kremlin officially rejects such intentions.

Anyhow, the geopolitical tension is not yet de-escalating: the emphasis has somewhat shifted, but the threat of further escalation remains high. On this wave, EUR/USD traders do not risk opening large positions in favor of the euro or favor of the US dollar. And although the euro is under additional pressure from the ECB President, Christine Lagarde (who criticized the "hawkish scenario" of a rate hike), traders stagnated in anticipation of the outcome of the geopolitical conflict. We believe that EUR/USD traders will continue to trade in a flat, waiting for the outcome of Antony Blinken-Sergey Lavrov meeting.

The priority in the coming weeks is still the short positions in the EUR/USD pair. Even considering the "doubts" of some members of the US regulator, the divergence of the positions of the Fed and the ECB has only intensified recently. All the unanswered questions will finally be placed in March (when the March meetings of the Central Banks will take place), but this is still relatively far away. To date, traders are forced to remain in the flat, within the area of 1.13. Therefore, short positions can be considered with the first target of 1.1330 (the average line of the Bollinger Bands on the daily chart) and 1.1305 (the Kijun-sen line on the same timeframe) when approaching the level of 1.1400.