FX.co ★ Eurozone countries under threat of economic slowdown due to high inflation

The European currency is making its way to the next weekly highs and clinging to the level of 1.1160, confirming the positive mood of buyers of risky assets after yesterday's negotiations between Russia and Ukraine. And although many investors took the statements with caution, the easing of geopolitical tensions will contribute to the further strengthening of the EURUSD pair.

Yesterday, Russian representatives received written proposals from Ukraine confirming its desire for a neutral and nuclear-free status. In general, the meeting can be considered positive, and the negotiations are quite constructive. "We have received proposals from Ukraine to consider their clearly formulated position on inclusion in the treaty," Vladimir Medinsky said. They even talked about the possible signing of a peace treaty, at which a meeting between Vladimir Putin and Zelensky is possible. Medinsky also noted that at the moment, subject to rapid work on the agreement and finding a compromise, the opportunity to conclude peace will become closer.

The European currency received support today following the speech of European Central Bank President Christine Lagarde. Although traders were counting on a more aggressive tone, the statements made indicate the real concern of the head of the central bank about what is happening, which sooner or later will force the central bank to be more active. Lagarde warned of the harmful consequences of Russia's conflict in Ukraine and called on governments and investors to provide funding to strengthen Europe's resilience.

Immediately there was news that Germany had launched an emergency plan to prepare for the likely shutdown of Russian gas, as President Vladimir Putin continues to insist that payments now take place in Russian rubles. Yesterday, Economy Minister Robert Habek said that Europe's largest economy, which receives more than 50% of natural gas from Russia, initiated the first of three stages of the plan, as the supply situation may deteriorate significantly in the future. Russia's offer to settle in rubles was called a violation of the terms of the contract by European countries from Germany to Italy. However, the measures taken by the Russian authorities are a direct response to the sanctions and the confrontation of Europe, which threatens to turn the energy markets even more. European gas prices rose by 15% after Germany's announcement, but then declined.

Returning to Lagarde's speech today, it is worth noting that the ECB is well aware of the significant risks to the economic growth of the eurozone. High energy prices, rising food prices and emerging problems in supply chains will certainly lead to a larger increase in inflation, which will require the central bank to take more active actions regarding monetary policy. "The best way to deal with uncertainty now is to follow the principles of gradualism and flexibility," Lagarde said.

Let me remind you that European politicians at the last meeting decided to completely end the emergency bond purchase program and stated that the regular purchase program could be stopped as early as the third quarter. The central bank will take such measures, provided that serious fundamental changes are observed – this, in fact, is happening now.

According to a recent survey of purchasing managers published by S&P Global, the eurozone manufacturing sector is facing an unprecedented increase in costs for spare parts and raw materials, which will negatively affect consumer prices in the coming months. The survey data emphasize that Russia's military special operation on the territory of Ukraine has a significant impact on the eurozone economy, and also reveals the risk of a serious drop in eurozone GDP in the second quarter. Even before March of this year, overall business activity was in excellent shape and was supported by the services sector, which grew after the easing of restrictions related to the coronavirus. According to S&P Global, businesses are already preparing for a weaker growth in activity, and the recent drop in confidence to the lowest level in almost a year and a half is proof of business preparation for another bad stage.

And although Lagarde downplayed the likelihood of a stagflation scenario last week, saying that even the darkest scenario for 2022 foresees the growth of the eurozone economy by 2.3%, however, not everything has been happening lately as eurozone politicians think.

As for the technical picture of the EURUSD pair

Geopolitical tensions around Russia and Ukraine remain quite high even despite the recent breakthrough in negotiations. Given the aggressiveness of the Federal Reserve's policy, it is best to bet on further strengthening of the dollar. To maintain the bull market, euro bulls need a breakthrough above 1.1160, which will allow the correction to continue to the highs: 1.1200 and 1.1230. In case the trading instrument falls, bulls will be able to count on support in the area of 1.1100. Its breakdown will quickly push the trading instrument to the lows: 1.1070 and 1.1030.

As for the technical picture of the GBPUSD pair

The pound is stuck in a wide horizontal channel and for the bulls to continue to grow, they need to think about how to return the resistance to 1.3160. This can be done after a confident defense of the support at the base of the 31st figure, which also needs to be thought about carefully. In case of a breakdown of this range, the nearest major supports will be seen in the area: 1.3060 and 1.3003. It will be possible to talk about the continuation of the bull market only after the breakdown above 1.3160, which will lead to an instant jerk of the pound to the highs: 1.3190 and 1.3220.