Euro-Dollar's Ukraine-linked Relief to be Short-lived: Barclays

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Progress towards a ceasefire in the Ukraine war is "far from a euro-positive," warn strategists at Barclays in weekly FX note.

Strategists think the Ukraine peace deal plan neither looks easy to implement nor does it promote European security.

"In our view, both tariff-related and war-related premia are currently smaller than our models dictate, and we think pullbacks are opportunities to re-engage from the long side in the dollar," says Barclays FX strategy desk.

The Euro, Pound and other European currencies rallied by more than a per cent against the Dollar last week on news President Donald Trump had taken preliminary steps towards a peace deal with Russia's President Vladimir Putin.

However, Trump made it clear there was no place at the negotiating table for European countries, signalling to European capitals that they are going to have to take far more responsibility for the defence of Europe.

European leaders have expressed concern about being sidelined in the U.S.-Russia discussions. French President Emmanuel Macron is coordinating an emergency meeting of European leaders to discuss further steps, while Finnish President Alexander Stubb has called for increased sanctions on Russia to strengthen Ukraine's position.

The exclusion of European nations from the peace talks has raised questions about the future security architecture of Europe and the role of NATO.

"Trump's Ukraine peace plan is also a net negative for European security and does not bring the resumption of gas flows from Russia any closer," says Barclays.

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U.S. and Russian negotiators will meet in Saudi Arabia this week to form the outlines of a peace plan, without any input from Ukraine.

Ukrainian President Volodymyr Zelenskyy has firmly stated that Ukraine will not accept any peace agreement resulting from U.S.-Russia talks if Ukraine is not an active participant.

For FX, this all points to limited potential for further relief-style gains.

"Scope for a further rally in European FX on a potential Russia-Ukraine ceasefire deal is limited. Provisional details are negative for Europe's security and the war premium is low. In fact, the EUR and CEE FX face asymmetrically larger downside risks if those hopes come to naught," says Barclays.