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Risk off trading continues as investors react to distressing Ukraine headlines

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2 March 2022

Written by
Matthew Ryan

Senior Market Analyst at Ebury, Chartered Financial Analyst. Providing expert currency analysis so small and mid-sized businesses can effectively navigate international markets.

Financial markets remained volatile on Tuesday as investors continue to digest the latest news out of the Russia-Ukraine conflict.

T
he mood in FX on Tuesday morning was one of pessimism, with the ‘risk off’ narrative again dominating moves in currencies. Those that suffered the largest sell-offs at the start of the invasion were back nursing losses again yesterday, notably the currencies in Central and Eastern Europe. The Polish zloty fell to its lowest level since 2009 on the euro at one stage, before verbal intervention from the country’s central bank reversed some of its losses, with the Hungarian forint depreciating to a record low. The safe-havens continued to rally, notably the dollar. EUR/USD fell below the 1.11 mark, a fresh low since May 2020, with the pound also retreating back towards the 1.33 level.

News headlines out of the conflict remain highly concerning, with missiles hitting the heart of Ukraine’s second largest city Kharkiv, and explosions reported in the capital Kyiv. A large convoy of military vehicles stretching 40 miles also continues to advance on Kyiv, although it has at least been hit by fuel shortages. Amidst the distressing headlines, there remain some reason for optimism, notably reports from US sources that morale among Russian military units has suffered, and that some are surrendering without a fight. Investors are, however, still in a highly cautious mood, and failed to react with much gusto to the so far unconfirmed reports. Market sentiment continues to remain fragile, and until we get concrete news on a de-escalation in the conflict, the safe-havens are likely to be well supported at the expense of risk assets.

As mentioned earlier in the week, one of the key economic consequences of the crisis is expected to be even higher inflation. ECB members de Guindos, Schnabel and Lane will all be speaking today, with investors hopeful to receive word on how the crisis could impact the bank’s March policy decision. While we expect caution from most banks in the near-term, the increase in inflationary pressures brought about by the crisis suggests medium-term hawkish ramifications. Indeed, data out so far this week suggests that price growth is showing no signs of easing up just yet, with inflation data for Germany, Italy and Spain all beating economists expectations – inflation data for the wider Euro Area later today may well follow suit.

Federal Reserve chair Jerome Powell will also be testifying to Congress later today. This could be a key event risk for markets, particularly should Powell provide any indication as to whether the Russia-Ukraine crisis may impact its upcoming policy decisions. Regardless, news headlines out of Ukraine look likely to dominate action once again today.

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