Did EUR/USD Just Dead Cat Bounce?

EUR/USD surged higher on Wednesday as the European Union (EU) discussed increased defence and energy sector spending ahead of the European Central Bank (ECB) interest rate decision on Thursday. The pair recently traded at 1.1067, representing a 1.6% gain on the day - its biggest daily percentage gain since 3 February 2016.

Long-term, 1.085 to 1.036 has certainly acted as a past buy zone. Furthermore, the latest look down and subsequent rise in EUR/USD solidifies a symmetrical triangle pattern post the 2015 price collapse, which leaves scope for further rises before any fall.    

Still, it’s far too early to start speculating whether this represents the beginning of a big reversal in EUR/USD’s fortunes. Risk related to war in Ukraine remains acute and has a potential to escalate. Reprisals against the West for ratcheting up sanction against Russia are an immediate threat.  

EUR/USD, despite Wednesday’s rally, remains down by c. 2.6% since the Ukraine conflict began on 24 September for good reason. Fears of further escalation only tell part of the story. Foreign exchange markets have yet to contend with the longer-term implications the conflict will have on the pair.

The ECB meeting on Thursday may provide the first window of opportunity for the central bank to discuss some of those implications. Will the ECB assess that the short-term inflationary impact of war trumps the long-term economic negatives?

Consensus doesn’t expect any interest rate change from the ECB. But it does see potential for a rejiggering of ECB asset purchases and communications distancing the timing of an interest rates hike. That said, comments from the succeeding ECB press conference are almost guaranteed to matter more.