“Moreover, if Euro Area growth holds up reasonably well and the ECB remains on track to raise rates this year, we would still see a bullish structural outlook for the currency,” they said.

“For now we stay on the sidelines in EUR crosses while we await more clarity on the unfolding geopolitical crisis.”

BMO Capital Markets noted that the smaller downturn in the euro compared to other European currencies is partly due to the high level of liquidity in the EURUSD exchange rate.

“The backdrop points to a period of less inward investment into Europe from abroad, weaker economic growth due in part to rising inflation, and a further deterioration in the trade balance due to the high price of oil,” BMO strategists said.

“Therefore, we wouldn’t judge the move in EURUSD as being over-extended yet from a fundamental perspective.”

 

Ruble and Eastern Europe

 

The Russian ruble has lost more than 64% to the dollar year-to-date to reach a record low, in large part due to the surprising severity of western sanctions imposed on Russia and its financial system, which aimed to isolate Moscow from the global economy.

 

Central to the size of the decline last week, according to BMO, was the effective freeze on the Central Bank of Russia’s ability to use its masses of foreign exchange reserves, the majority of which were denominated in euros and held with EU banks.

 

The favorable starting point of Russia’s external position prior to the invasion, the lack of a full and immediate ban on EU imports of Russian fossil fuels, and CBR’s doubling of the benchmark interest rate to 20% have somewhat mitigated the size of the move in USDRUB,” said BMO foreign exchange chiefs Greg Anderson and Stephen Gallo.

 

“However, we cannot be sure that the screen price for USDRUB reflects the true price that Russian citizens and businesses might be forced to pay for USDs if they were to attempt to liquidate their RUB now.”