ccording to Russia’s defence ministry, the country has withdrawn some of its 100,000 troops from the Ukrainian border. The head of Nato also raised hopes of an easing in tensions, saying that signals from Moscow provide reason for optimism, despite no signs yet of a de-escalation. The reality remains that markets don’t really know what to think of the contrasting headlines, and until we get more information on the situation in the next day or so, moves in currencies in either direction are likely to be relatively mild. What we do know is, that markets would respond positively to news of a deal. On Tuesday, most risk assets rallied on the positive headlines, notably the Russian Ruble and Eastern European currencies, led by the Polish zloty. The safe-haven dollar was also broadly weaker, with EUR/USD moving back above the 1.135 level.

News on the Russia-Ukraine situation looks set to remain the number one driver of currencies during the remainder of the week. We will, however, be paying close attention to a host of economic data releases on Wednesday, starting with the latest UK inflation data for January out this morning. Consensus is in favour of an unchanged reading of 5.4%, although given economists have continued to massively underestimate the extent of the recent global inflation overshoot in recent months, we think that another surprise to the upside here is on the cards. Sterling has been stuck in a bit of a narrow range against the dollar in the past couple of weeks, with the pound only receiving modest support from yesterday’s strong December labour report, which showed another uptick in earnings (Figure 1) and a drop in the number of unemployment benefit claims. An inflation shock today may, therefore, be required to snap the currency out of its recent slumber.

Figure 1: UK Average Hourly Earnings (2015 – 2022)