Ukraine War De-Escalation Could Boost the Euro

The Euro has been steadily losing ground in the wake of the war as Russia plays its gas supply card and the EU sanctions on Russia disrupt the trade flow. 

The currency is set to lose over 3% against an average of its main peers over the next three months, marking its worst three-month performance in seven years. Combined with losses in the second half of last year, the Euro is on track to shed about 4.5 percent in the next nine months. 

Russia accounts for a huge chunk of total trades in the EU, being its largest supplier of energy, wood, fertilizer, and steel. Last year, EU companies sold almost €120 billion in goods and services to Russia. This economic activity has been seriously hampered by the invasion and the follow-on sanctions. 

While the war still rages as of this writing, de-escalation could be on the horizon. The Kremlin may be willing to withdraw its troops in exchange for sanctions relief contingent on agreement to debate territorial claims “later”.

Kyiv, for its part, hinted that it is willing to make significant concessions such as recognizing “neutrality” between Russia and the NATO alliance as one of the deal’s terms.

If a de-escalation deal were to be struck soon between Russia and Ukraine, it could boost the Euro in the second quarter. 

However, the Euro may struggle to maintain any gains as the European Central Bank is unlikely to raise interest rates to combat soaring inflation. If a Ukraine-related boost elevates the Euro early in the second quarter, its impact may have long faded by the time Q3 kicks off.