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Markets stabilise on hope of Russia-Ukraine ceasefire

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3 March 2022

Written by
Matthew Ryan

Matthew Ryan is Ebury’s Global Head of Market Strategy, based in London, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.

Markets generally stabilised on Wednesday following a hectic few days, with hope of a possible ceasefire between Russia and Ukraine providing a bit of a relief from the recent sell-off.

W
ith Russian attacks on Ukraine’s major cities intensifying in the past 24 hours, market sentiment remains rather fragile, although risk currencies, for the most part, managed to regain some ground yesterday. These gains were led by the commodity-dependent ones, such as the Australian and Canadian dollars, which continue to be well supported by the jump in oil prices and commodities in general. Brent crude oil futures rose to around the $114 a barrel mark during London trading amid the threat of additional sanctions on Russia’s oil and gas industry. So far, neither the EU or US have placed a total ban on oil and gas imports from Russia, although President Biden did open the door to such action yesterday. This has raised fresh concerns over potentially more significant economic ramifications for both global growth and inflation.

Indeed, markets are now beginning to turn their attention to how the main central banks will respond to the crisis. Speaking during his Congress testimony, Federal Reserve chair Jerome Powell explicitly indicated support for a 25 basis point hike when the FOMC next meets in a couple of weeks time, although he noted that the bank will proceed carefully in light of the uncertainty created by the Ukraine conflict. The Bank of Canada also followed through with its first pandemic era rate hike yesterday, raising rates by 25 basis points to 0.5%, as expected. The BoC noted that the invasion of Ukraine was putting further upward pressure on prices, and that additional hikes will likely be required – financial markets now expect a hike at every meeting through to October.

The difference between the Fed and Bank of Canada on the one hand, and the European Central Bank on the other, is that the economy of the Euro Area is far more interconnected with its Russian counterpart. Policymakers at the ECB will be convening next Thursday and uncertainty going into the meeting is higher than ever. Given the heightened risks to Euro Area growth, a cautious tone of communications is likely, although the clear increase in inflationary pressures cannot be ignored. Data out on Wednesday showed that even before the invasion, prices in the Eurozone had risen again, with the headline measure of HICP inflation jumping to a fresh record 5.8% in February, well above the 5.4% consensus.

In the meantime, focus remains firmly on Ukraine, particularly news out of talks between Ukrainian and Russian officials in Belarus this morning. News of a ceasefire would no doubt buoy risk assets today.

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