FX.co ★ EUR/USD. Geopolitical signals: heat is declining, the dollar is no longer in favor

The euro-dollar pair tested the area of the 12th figure against the background of yesterday's events, but could not gain a foothold below the 1.1300 mark. By and large, no one knew exactly how yesterday would end – what kind of decision Russian President Vladimir Putin would make, especially against the background of rather harsh accusatory rhetoric against the current Ukrainian government. Therefore, after the end of the meeting of the Security Council of the Russian Federation, the dollar gradually began to gain momentum: the greenback was in high demand as a protective asset.

Today, pressure on the EUR/USD pair increased against the background of conflicting signals from Russia's State Duma. Initially, Deputy Chairman of the Federation Council Committee on Foreign Affairs Andrey Klimov said that Russia recognizes the LPR and the DPR within the borders that are "now actually established." While this morning there was information that the Duma may recognize the self-proclaimed republics within the borders of the Donetsk and Lugansk regions of Ukraine. The second option would increase the likelihood of a large-scale military escalation, given the fact that Vladimir Putin instructed the Russian Defense Ministry to ensure the "maintenance of peace" in the DPR and LPR by the Russian armed forces. It is also necessary to take into account another fact in this context. Addressing Kyiv, the Russian president demanded an end to hostilities, warning of "responsibility for the possible continuation of bloodshed." However, he did not specify what exactly he meant.

Given this disposition, Russia's recognition of the LPR and the DPR within the Donetsk and Luhansk regions could significantly increase the degree of intensity. The risk of further large-scale escalation would have increased in many ways. Therefore, at the start of the European session, the EUR/USD pair updated the weekly price minimum. However, dollar bulls failed to organize a downward rally.

Some Russian media, citing their sources, reported that the deputies of the Russian parliament would not specify the territorial boundaries. Also, one of the deputies of the State Duma said that "the Russian side will not deal with the demarcation of the border - let it be carried out by the parties that have declared themselves states." As a result, Moscow's official position was announced, which was subsequently supported by members of parliament: "the borders of the LPR-DPR will be determined by separate agreements with Russia. At the moment, the Russian Federation recognizes the LPR and the DPR within the borders within which the leadership of the republics exercises its powers." At the same time, Moscow promises them military assistance and will be able to build military bases on their territories. The L/DPR, in turn, undertake not to join blocs against the Russian Federation.

Against this background, EUR/USD buyers again seized the initiative, despite the belligerent statements that have been made and are still being made by the LPR. We are talking about a statement by a high-ranking representative of the LPR, who demanded that Ukraine withdraw troops to the administrative border of the Luhansk region. He stressed that "the territory of the LPR is the entire region, in connection with which Kyiv needs to voluntarily withdraw troops, otherwise measures will be taken." A similar statement was made by the head of the DPR. However, these words were ignored by traders: all the attention of market participants was focused on Moscow and Washington.

It is worth noting that the United States reacted quite mildly to Vladimir Putin's decision yesterday, despite the fact that Joe Biden has already signed a decree imposing sanctions. However, these sanctions are not part of and do not relate to the package of maximally strict economic measures that the United States, together with its allies, planned to impose against the Russian Federation "in the event of a large-scale invasion of the territory of Ukraine" (these are, in particular, restrictions on energy exports, disconnection from SWIFT, etc.). Washington's de facto reaction does not concern Russia at all. The new sanctions prohibit new investments and financial activities of US representatives on the territory of the LPR and the DPR, the import into the US of any goods, services, or technologies from these territories, and the export, directly or indirectly, of goods, services or technologies from the US to the L/DPR.

This reaction of Americans also reduced the level of anti-risk sentiment in the foreign exchange market – at least in the context of most dollar pairs (including EUR/USD). Traders of the euro-dollar pair returned and gained a foothold within the 13th figure, where they were before the above-mentioned events of a geopolitical nature.

And yet, despite some clarity that has appeared compared to yesterday, it is still risky to open any positions on the EUR/USD pair now. First, the situation is not yet balanced. Judging by many indirect signs, the parties do not intend to follow the path of large-scale escalation: martial law has not been imposed on the territory of Ukraine, the State Duma of the Russian Federation has not recognized the L/DPR within the two Ukrainian regions, and US sanctions are not focused on Russia. On the other hand, bellicose statements from the LPR and the DPR also cannot be ignored, given the background of this issue and military support from the Russian Federation.

Therefore, in my opinion, at the moment it is advisable to maintain a wait-and-see position for the EUR/USD pair. Traders react quite nervously to the news flow, ignoring the "classic" fundamental factors. If all sides of the geopolitical conflict do not follow the path of escalation ("freezing" the situation at the points reached), tomorrow or the day after tomorrow the foreign exchange market will turn over this chapter and return to the classic macroeconomic fundamental factors.