EUR / USD
The Euro was able to demonstrate some resilience in early Europe on Thursday as markets continued to monitor Ukraine events closely. Selling pressure on the single currency gradually increased amid fears over the economic impact on the Euro-zone and confidence then deteriorated sharply, especially following reports that Russian forces had entered the Kyiv region while there were further attacks on Ukraine military targets.
Euro losses accelerated, especially with speculation that the ECB would be forced to back away from any move to tighten monetary policy, although there was still a high degree of uncertainty, especially as the surge in energy prices will put further near-term upward pressure on inflation.
The dollar also gained significant defensive demand as risk conditions deteriorated and commodity currencies declined sharply. There were also expectations that the US economy would be hit less badly than Europe. Commentary from Federal Reserve officials will still be watched closely given the possibility that there will be a change to the March policy decision. The Euro slumped to 20-month lows close to 1.1100 while the dollar index posted a 20-month high on defensive demand.
Sanctions imposed by Western countries concentrated on financial measures and individuals with no move at this stage to block commodity exports. There was a sharp reversal in market conditions with a substantial recovery in risk appetite amid hopes that the global economy would not be derailed as the West did not block key Russian exports. The Euro rallied back above the 1.1200 level and traded around this level on Friday with further volatile trading inevitable and Euro selling on rallies.
JPY
US New home sales declined to an annual rate of 801,000 from a revised 839,000 previously. Initial jobless claims declined to 232,000 in the latest week from 249,000 and slightly below consensus forecasts of 235,000 while continuing claims declined to 1.48mn from 1.59mn. The data had little impact of monetary policy expectations.
Wall Street equities pared losses after the New York open and there was also a decline in Treasuries with the 10-year yield increasing to near 1.95%. As yields increased and equities rallied, the dollar posted net gains to 115.50 and the Euro recovered from intra-day lows against the yen.
Kansas City Fed President George stated that inflation risks were to the upside, but also noted that the events unfolding in Ukraine would be taken into account when assessing how quickly accommodation should be removed. Fed Governor Waller, however, stated that concerted action was needed to rein in inflation and there would be a strong case for a 0.50% rate hike in March if the data is exceedingly hot. Rhetoric will be watched closely in the short term.
Treasuries were little changed on Friday and Asian equities rallied with the dollar trading around 115.25 and the Euro around 129.05.
GBP
The CBI retail sales index retreated to 14 for February from 28 previously and below consensus forecasts of 25. Sales are expected to be close to the seasonal average for March while there was further strong upward pressure on prices. The latest ONS data indicated that retail footfall was only marginally below February 2020 levels.
Bank of England chief economist Pill stated that inflation was uncomfortably high, but he added that the central bank would seek to bring fast-rising inflation down in a measured way that doesn’t disturb the rest of the economy.
The comments continued to dampen expectations that the Bank of England would decide on an aggressive 0.50% rate hike at the March policy meeting. The shift in expectations continued to undermine Sterling support and the UK currency was also hit hard by the slide in risk appetite and fresh fears over the European economic outlook. Sterling declined very sharply to 2-month lows near 1.3275 after the Wall Street open.
There was a strong recovery to near 1.3400 as buyers stepped in and risk conditions improved while the Euro securing a limited net advance to 0.8360. Sterling traded around 1.3415 against the dollar on Friday, but unease over the economy sapped support with a sharp decline in consumer confidence to a 13-month low for February
CHF
The Swiss currency continued to gain defensive support during Thursday as risk appetite continued to deteriorate, although the franc did retreat from intra-day highs.
The Euro dipped to lows at 1.0280 before a recovery to 1.0330 while the dollar posted a strong advance to highs near 0.9290.
Markets will continue to monitor potential efforts by the National Bank to curb franc gains. The franc lost some support on Friday with a stronger tone surrounding risk conditions. The Euro advanced to the 1.0360 area with the dollar around 0.9230 with very choppy trading inevitably continuing.
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