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When nothing else matters

Last week, we spoke about the potential for FX volatility to climb in the coming weeks, and of course, the realisation of Europe’s worst fears with Russia’s invasion of Ukraine caused a 2.5% fall in Sterling against the US Dollar in less than 48 hours. However, towards the end of the week, risk assets managed to recover on nothing particularly positive, with stocks and Treasury yields rising to pre-invasion levels. This is quite puzzling when factoring in the likely effect of slowing global growth and the risk to inflation from rising energy costs—not to mention markets’ already ambitious pricing of interest rate hikes across developed economies.

For now, our case is for further bouts of USD strength in the coming week—particularly against the heavily exposed Euro—as the West ratchets up its response to Russia’s aggression. Over the weekend, fresh penalties were brought in to isolate Russia from the global financial system. It was announced that certain Russian banks would be excluded from the SWIFT network, while the central bank would lose its ability to use foreign reserves to blunt sanctions. While the US and Europe have been careful to avoid including energy from existing sanctions, Putin could still respond by restricting flows of gas to Europe, which relies on Russian imports for 40% of its supplies.

Bottom line: In a Bloomberg-produced scenario where natural gas prices return to December’s €120/Mwh level and oil rises to $120/barrel, year-end Eurozone inflation would hit 4%, while the US would hit 6%. The hit to Europe’s Gross Domestic Product would almost certainly prohibit the European Central Bank from raising rates this year—a stark contrast to markets that expect three hikes between now and December. On a technical basis, EUR/USD is susceptible to another move lower towards the 1.1050 level, almost 4% down on February’s high.

EUR/USD exchange rate, source: Bloomberg

The week ahead


Sterling performed poorly over the last week, falling against all other G10 currencies as safe-haven assets came into favour following Russia’s invasion of Ukraine on Thursday. UK Consumer Confidence dropped to its lowest levels since January 2021 as tax rises, an increase in the cost of living, and the prospect of an interest rate hike cycle by the Bank of England threaten to put pressure on personal finances. BoE Deputy Governor Dave Ramsden emphasised more modest tightening could be needed, as additional uncertainties have clouded the growth picture in recent weeks. UK Chancellor Rishi Sunak has announced measures preventing UK individuals and businesses from doing business with Russia while also working with the US and EU to block Russian banks from the SWIFT payments system. 

  • Bank of England Monetary Policy Committee members Michael Saunders, Catherine Mann, Silvana Tenreyro, and Jon Cunliffe are due to speak throughout the week.
  • The British Retail Consortium Shop Price Index y/y will be published on Wednesday. Last month's reading came in at 1.5%.
  • The Nationwide House Price Index m/m will also be released on Wednesday, with analysts expecting a 0.6% reading for February versus 0.8% in January.
  • This week, final Manufacturing and Services Purchasing Managers’ Indices are forecast to remain unchanged at 57.3 and 60.8 for February. The UK Construction PMI will be posted on Friday; a 57.4 reading is expected. 



The Euro has somewhat recovered since its 1.80% fall against the US Dollar as Vladimir Putin ordered his troops into Ukraine on Thursday last week. Stocks continue to sell off following a momentary rally on Friday; the Europe Stoxx 600 was down 1.35% in early trade. European bank stocks that derive a significant portion of their profits from Russia are also under pressure as sanctions kick in, with Raiffeisen Bank down 14.00% today. Elsewhere, according to some sources, European Central Bank Chief Economist Philip Lane has suggested that the war in Ukraine could dampen GDP growth in the Eurozone by up to 0.40% this year. This could create another headache for the ECB in the next monetary policy meeting on the 10th of March, as the central bank tackles the prospect of slowing growth and rising inflation.

  • Spanish Unemployment Change will be announced on Wednesday. Analysts are expecting a -44.5K reading in February, following a print of 17.2K in January.
  • Eurozone flash Consumer Price Index and Core CPI y/y are forecast to come in at 5.4% and 2.5% respectively for February versus 5.1% and 2.3% in January.
  • The latest European Central Bank Monetary Policy Meeting Accounts will be released on Thursday.
  • Eurozone Retail Sales m/m for January will be published on Friday, with markets expecting a 1.5% gain after a 3.0% contraction in December.



Safe-haven assets have been in favour following increased geopolitical tensions surrounding the Russia-Ukraine crisis, and the US Dollar Index has climbed over 1.0% over the last week as a result. Gold has also risen to levels last seen in May 2021. USD/RUB has been trading over the 100 handle this morning following SWIFT sanctions. The Bank of Russia has since raised its interest rate from 9.5% to 20.0% to try and avoid a currency crisis as war-related devaluations and inflation threaten to cripple the country’s finances. S&P 500 futures are trading higher today following an end-of-week rally on Friday. Markets have tapered their expectations of Federal Reserve interest rate hikes since the outbreak of conflict in Ukraine. Pricing is now converging closer to a 25 basis-point hike in the March meeting, rather than the 50 basis-point increase that was expected just last week.

  • ISM Manufacturing and Services Purchasing Managers’ Index data will be released this week. Respective readings of 58.0 and 60.9 are anticipated.
  • ADP Non-Farm Employment Change for February will be published on Wednesday. Forecasts point to a 378K reading verses -301K in January.
  • Federal Reserve Chairman Jerome Powell is set to testify before the House Financial Services Committee and Senate Banking Committee this week.
  • To close out the week, we’ll get the latest Non-Farm Payrolls data for February with consensus indicating a 400K print versus 467K last month. As of February, the Unemployment Rate looks set to fall 10 basis points to 3.9%.


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