How a Ceasefire in Ukraine Could Affect the Euro

The EURUSD fluctuated this week on contradictory inflation data from the US and anticipation of the meeting between Russian and US leaders late on Friday. Obviously, if there is an agreement to cease hostilities in Ukraine, it will have an effect on the Euro. But, given the volatility in the markets, the reaction might be a bit counterintuitive.

One of the key elements to dissect is the rise in the EURUSD through the course of this year. Many media headlines have talked about the “weakness” in the dollar. But the basket of currencies that make up the dollar index has a 57.6% weighting of the Euro. Meaning that the dollar move could have a lot to do with what’s going on in Europe, as well. Is it more that the Euro is getting stronger, or the dollar is getting weaker?

Ukraine War Fuels Euro Rise

The big FX trade of the year has been to “sell American”, particularly since the scope of tariffs was revealed. This has contributed to dollar weakness, notably since the start of April. But when selling a currency, you have to buy another one. In this case, it has been the Euro.

Around the same time, the EU pledged to drastically ramp up defence spending due to concerns that the US wouldn’t support European national security. The big difference revolved around support for Ukraine, with the Trump Administration wanting to exit the conflict. This has helped push European-based defence stocks such as Rheinmetall to triple-digit gains. Traders wanting to get in on the expected growth in Europe have been buying up Euro assets.

A Peak for the Euro?

Of course, it’s not just defence, as Europe has also pledged to increase infrastructure spending as well. The Euroarea is also coming out of a period of economic stagnation after the ECB raised rates to control inflation. Since the start of the year, the ECB has been easing, which is presumed to lower borrowing costs and also support economic growth. Now that the US and the EU have reached a trade deal, there seems to be more stability in what businesses can expect in terms of tariffs. That might unlock additional spending and therefore growth.

That means that the status quo in terms of geopolitics is favouring the Euro. If the war in Ukraine were to come to an end, it would cause a new alignment in incentives. Without an actual shooting war on its border, the EU might be less pressured to increase defence spending. After all, the EU is facing a debt crisis of its own, and the recent stagnation has been attributed to austerity measures to get government spending in line.

A Pleateau or Downhill?

Reaching a ceasefire in Ukraine might be a prolonged process, which could leave traders hopeful that the EU will carry out its spending programs. But an agreement also means that the EU could avoid further tariffs, and might even regain access to cheaper energy, which could help its economy recover.

On the other hand, Russia refusing to end the war might have a negative impact on Europe. Depending on the context, Trump could try a “maximum pressure” strategy through his favourite tool: Tariffs. On Thursday, Scott Bessent brought up EU buying Russian oil in the context of plans to impose tariffs on countries that purchase oil from Russia in a bid to pressure Putin to the negotiation table. He also hinted that the EU might avoid punitive measures if it joined the US in secondary tariffs on India and China. But that would also hurt the EU economy in a different way. Investors might reverse their optimism about EU growth, and that could leave the EURUSD falling.

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