Euro US Dollar (EUR/USD) Exchange Rate Slumps amid Fed Expectations and Russia Fears

Euro US Dollar (EUR/USD) Exchange Rate Drops as Markets Brace for Fed Decision

The Euro US Dollar (EUR/USD) exchange rate slumped today as markets prepare for the Federal Reserve decision tomorrow and fears of an escalation in Ukraine worry European investors.

At the time of writing, EUR/USD is trading at around $0.9974, having fallen more than 0.4% from this morning’s opening level of $1.0018.

US Dollar (USD) Firms on Fed Rate Rise Bets

The US Dollar (USD) strengthened today as markets continue to bet on another strong interest rate rise from the Federal Reserve.

Analysts expect the US central bank to raise the fed funds rate by at least 75 basis points, with some traders betting on a full percentage point hike.

Today these expectations have pushed the ‘Greenback’ higher, prompted by a surprise 100-bp hike from Riksbank – Sweden’s central bank.

In response, US Treasury yields are on the rise. The 10-year note has hit a fresh 11-year high, pushing the US Dollar up.

Euro (EUR) Dented by Russia-Ukraine Worries

Meanwhile, the Euro (EUR) is facing selling pressure today amid concerns that Russia could be considering full military mobilisation.

Russian-backed separatists in occupied areas of Ukraine have declared intentions to hold referendums on joining the Russian Federation, as the Ukrainian counteroffensive continues to make headway.

Analysts fear that such referendums – which Western commentators say would undoubtedly be rigged – could see Moscow officially declare war on Ukraine. If Ukraine’s military continues its offensive into the occupied areas, the Kremlin may consider it an attack on Russian territory.

The news comes as Russia’s parliament has passed a bill introducing harsher punishments for desertion and insubordination during a military mobilisation, further fuelling rumours that Russia may be preparing to escalate the conflict.

Ukrainian Foreign Minister Dmytro Kuleba said that Ukraine ‘will keep liberating’ occupied territories. Kuleba tweeted:

‘Sham “referendums” will not change anything. Neither will any hybrid ‘mobilisation’. Russia has been and remains an aggressor illegally occupying parts of Ukrainian land. Ukraine has every right to liberate its territories and will keep liberating them whatever Russia has to say.’

These fears are weighing on European markets today, with the Euro in particular taking a hit. If Russia declares all-out war, the conflict could drag on for longer and cause more economic damage to the Eurozone.

EUR/USD Exchange Rate Forecast: Fed Decision in Focus

Looking ahead, a speech from European Central Bank (ECB) President Christine Lagarde could impact EUR/USD this evening. Markets have been betting on more hawkish action from the ECB since its 75-bp hike two weeks ago. However, Lagarde has a tendency to temper market expectations. Could dovish comments dent the single currency?

Meanwhile, USD investors will likely remain focused on tomorrow’s Fed decision. With another 75-bp hike priced in, such a move might have a limited effect on the ‘Greenback’. A 100-bp hike, however, could see the US Dollar strengthen.

Until then, risk appetite may drive EUR/USD. If Russia-Ukraine fears continue to build, the Euro US Dollar pair could slip even further below parity.

Samuel Birnie

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