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The ever-escalating humanitarian and security crisis caused by Russia's invasion of Ukraine continues to plague financial markets. Volatile movements and flights to safe havens can be seen everywhere. Europe's assets are particularly affected by its geographical location and its susceptibility to disruptions to energy supplies. At the G10, the euro and the Swedish krona fared the worst, with exchange rates falling by around 3% and almost 5% respectively.
The rankings are currently led not by traditional safe havens such as the Japanese yen and the Swiss franc, but by currencies of commodity-exporting countries that are far from the war. Currencies such as the Australian and New Zealand dollars, the Colombian peso and the Brazilian real are benefiting from soaring global commodity prices. A stark contrast to the mass risk aversion that was seen until recently. Unsurprisingly, the Russian ruble and most other Eastern European currencies are at the opposite extreme, with sharp downward movements, led by the Polish zloty.
The ECB will meet on Tuesday. The outcome of this meeting is more difficult to predict than ever, as the central bank faces a huge stagflation risk, on top of the already existing emerging price pressures. In addition, February inflation data will be published in the US on Tuesday. These are likely to give the EUR/USD currency pair an extremely volatile trading day. Of course, the financial markets remain mainly focused on the news about the Russian invasion. In particular, they are on the lookout for signs of a ceasefire. These could cause a temporary rise in the price of the risk assets. Below is the most important currency in detail.
Of course, February's inflation report was completely overshadowed by the terrible news from Ukraine, but it's still worth mentioning. It was another upside surprise: both the headline and core figures were strong. This confirms that price pressures were already spreading before the war triggered a stagflation shock. The ECB is expected to react 'dovish' and postpone the discontinuation of monetary accommodation – which we had expected this week. This kind of postponement will have to be more than compensated for by an additional tightening of policy at a later date, if the ECB wants to seriously keep inflation expectations in the eurozone under control. For the time being, the path of least resistance for the single currency seems to lead downwards.
The Bank of England has so far failed to take a 'dovish' stance in response to Russia's invasion. In fact, last week there were two speakers who in no way suggested that the institution could make a 'dovish' U-turn. As a result, the British pound performed relatively well last week. The exchange rate was somewhere between that of the US dollar and the euro, and rose against all other European currencies. There is virtually no noteworthy news on the agenda this week. The exchange rate of the pound will be determined by events and publications elsewhere. However, we still see room for a continuation of the rally against the euro, based on the relatively hawkish stance of central banks and the fact that the UK is less dependent on energy imports than the eurozone.
Also, the U.S. jobs report didn't have as much impact as it would have under normal circumstances, but it does confirm that the U.S. labor market is doing very well. Strong job growth was accompanied by surprisingly subdued wage pressures. However, we would not want to make a statement on this until next month, as these figures show great volatility from month to month. Chairman Powell's testimony in the U.S. Congress was quite optimistic about the impact of the war on the U.S. economy. It is self-sufficient in terms of energy supply and is fairly well shielded from the conflict. Powell made it clear that the rate hike process has not been affected and that the first 25 basis points will arrive in March. This is in stark contrast to the ECB's clear 'dovish' stance, and explains the fall in the EUR/USD exchange rate.
By: Enrique Diaz-Alvarez
Enrique Diaz-Alvarez is chief risk officer and heads Ebury's analyst team in New York. Because of his drive, passion and thorough knowledge, Enrique is recognized by Bloomberg as one of the most accurate predictors of market movements.
About Ebury:
Ebury Makes international markets more accessible with tailor-made foreign exchange services and flexible trade credit for businesses. Ebury works with more than 12,000 organisations and carries out €12 billion in foreign exchange transactions in 140 different currencies. The company has offices in the United Kingdom, the Netherlands, Spain, and Poland. Ebury's priorities:
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