EUR/USD rebounds back above 1.1050 level from 22-month lows, still trading heavy as NFP looms

• EUR/USD hit fresh 22-month lows on Thursday in the 1.1030s amid ongoing euro weakness amid the Russo-Ukraine conflict.
• The pair has since rebounded back above the 1.1050 mark, but is still down about 0.5% on the day.
• Hawkish-leaning remarks from Fed Chair Powell also seemed to support the buck as focus turns to Friday’s US jobs report.

An ongoing surge in energy prices as traders bet on Russian supply disruptions due to sanctions, coupled with ongoing safe-haven demand amid the ongoing Ukraine conflict and arguably hawkish-leaning rhetoric from the Fed on Thursday has kept EUR/USD under pressure. The pair hit fresh 22-month lows in the 1.1030s and despite recovering back above the 1.1050 mark in recent hours, still trades with losses on the day of about 0.5%.

Fed Chair Jerome Powell, giving remarks at his semi-annual testimony before Congress, warned that the Fed could speed the pace of rate hikes at a later date this year if inflation is deemed as not falling fast enough. In other words, 50bps moves are on the table, though Powell has ruled out such a move at the meeting later this month, instead endorsing this week a 25bps move. Given that Powell also warned that developments in Ukraine pose upside inflation risks, FX market participants seem to be arriving at the idea that risks are towards the Ukraine crisis making the Fed more hawkish rather than less.

Market participants are still yet to decide whether this is also the case for the ECB, given the Eurozone economy's more pronounced downside growth risks as a result of the conflict, a factor weighing hard on EUR/USD. Indeed, some strategists have called for an eventual move back to March 2020 lows in the 1.0600 area should the Fed pivot hawkish to tackle inflation but the ECB delay chose to delay tightening in order to support growth.

Thinking about EUR/USD over a shorter time horizon, the pair’s negative correlation to surging energy prices (which are a bigger problem for the energy importing Eurozone versus the net energy exporting US) means near-term downside risks remain elevated. Geopolitics remains the main driver of commodities and thus remains a key factor for the pair. Traders would also be wise to keep an eye on upcoming for the release of the February US labour market report on Friday. A strong report could further boost the buck and push EUR/USD towards the key 1.10 mark.