ews that Russia’s Gazprom has cut off its supply of gas to Poland and Bulgaria in response to both countries refusing to pay in rubles added to the aforementioned growth fears on Tuesday. Since the start of the week, ongoing lockdowns in China, the war in Ukraine and the likelihood of an aggressive pace of central bank rate hikes (particularly in the US) have been at the forefront of investors’ minds. These risks to growth, combined with the sharp move higher in inflation globally, has triggered one of the most violent sell-offs in risk that we’ve seen in some time, certainly since the start of the COVID-19 pandemic in March 2020.

Understandably, the European currencies were among the worst performers yesterday, notably the euro, which fell below the 1.06 on the dollar to its lowest level in five years. Not only does Russia’s energy ban present a risk to the Eastern European region, but to Europe as a whole. Germany’s economy ministry said on Wednesday that it was revising lower its 2022 growth forecast to 2.2% from 3.6%, which heaped further downward pressure on the euro. Comments from ECB member Kazaks that the bank could raise rates three times this year, including at the July meeting, helped put a bit of a temporary floor under the euro, although further downside is likely so long as market sentiment remains fragile. The CEE currencies have also underperformed in the past couple of trading sessions, notably the likes of the Polish zloty, which is down around 3% for the week.

Figure 1: US Dollar Index (YTD)