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Risk-off mode intensifies amid ongoing Ukraine tensions

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22 February 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.

Investors remained on edge on Monday, with concerns surrounding the ongoing tensions between Russia and Ukraine triggering safe-haven flows into the likes of the Japanese yen and Swiss franc.

T
he yen rallied back below the 1.15 mark on the dollar for the first time in over two weeks after sources suggested that there were no concrete plans for a summit between Russian and US authorities. Reports over the weekend indicated that Vladimir Putin and Joe Biden had agreed ‘in principle’ to hold discussions on potentially finding an amicable solution to the crisis. Optimism on that front has, however, faded somewhat, particularly on the news of skirmishes on the Ukrainian border, and warnings that Russian cyber attacks aimed at agencies, banks and the defence sector could be on the way on Tuesday.

As was the case last week, market participants are not in panic mode just yet, and actually the moves in the major currencies have been rather contained. Emerging market currencies have seen a little bit more action, as one would expect, notably the Russian ruble itself, which fell by around one-and-a-half percent versus the euro yesterday. Whether a peaceful solution is reached is really anyone’s guess, and while markets appear fairly optimistic, investors are reacting negatively to the uncertainty. As long as this continues, volatility in financial markets is likely to remain rather lofty, and the safe-havens should remain well bid.

Aside from geopolitics, this week is a fairly busy one of macroeconomic data releases and speeches from central bankers. Monday’s Euro Area PMI figures were highly encouraging, although this failed to translate into any real strength in the euro. The composite PMI rose back to a five-month high 55.8 in February, well above the 52.7 expected, with businesses seemingly far less concerned with the economic impact of omicron than they were a month ago. Increases in activity were broad based, notably a sharp improvement in the services PMIs in both Germany (56.6) and France (57.9), with the latter rising to its highest level since January 2018.

Figure 1: G3 PMIs (2019 – 2022)

Source: Refinitiv Datastream Date: 21/02/2022

Meanwhile, a similarly impressive set of PMI numbers out of the UK also failed to translate itself into a stronger pound, perhaps an indication that investors are far more fixated with developments in Ukraine. The services index was particularly strong, rising to 60.8 this month from 54.1, its highest level since June last year. With PM Boris Johnson announcing yesterday that all remaining covid protocols, including isolation orders and free testing, will end on Thursday, the outlook for the UK economy appears rosy, and that can only bode well for sterling.

Revised US Q4 growth figures on Thursday may be a bit of a non-event given the lag in the data. We will be paying closer attention to this afternoon’s US PMI numbers from Markit for a much more timely indicator of economic activity. ECB member speeches from Elderson and De Guindos will be closely watched tomorrow. We expect recent improvements in economic data to be reflected in increasingly upbeat assessments from Governing Council members in the coming weeks.

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