EUR / USD
The Euro was able to stabilise in early Europe on Monday with asset prices resisting further selling pressure. Diplomatic and political pressures remained intense during the day as Western countries announced further sanctions against Russia. Switzerland announced that it would impose sanctions and match action taken by the EU which would further tighten pressure on Russia. There were some expectations of increased global dollar demand as financial sanctions bite and there were stresses in funding markets. In retaliation, Russia announced that its airspace would be closed to flights from 27 countries.
There was a further limited shift in interest-rate futures during the day with money markets pricing in 30 basis points of tightening by the end of 2022 compared with around 35 basis points at the end of last week. The first move to raise rates is also now seen in September compared with June previously.
The potential for a 50 basis-point increase in the Fed funds rate at the March meeting also declined to around 10% from 20% last week.
Atlanta Fed President Bostic stated that he favoured a 25 basis-point increase this month, but also stated that he would have to look at a 50 basis-point increase if the data persists at elevated levels. Testimony from Fed Chair Powell will be monitored very closely on Wednesday for further hints on the March decision.
Ukraine developments focussed on financial developments and overall yield spreads underpinned the dollar with the Euro just above 1.1200 in early Europe while commodity currencies maintained a firm underlying tone which dampened dollar support to some extent.
The US goods trade balance widened to a record $107.6bn for January from $100.5bn the previous month and compared with consensus forecasts of $100.0bn. There was a significant dip in exports for the month while imports increased by a similar margin. The widening deficit will have a negative impact on first-quarter GDP growth.
The Chicago PMI manufacturing index dipped sharply to 56.3 for February from 65.2 previously and below market expectations of 62.0.
Markets remained uneasy over the potential implications of excluding Russian banks from the SWIFT payments messaging system with concerns that there would be a further negative impact on global supply chains which would risk further upward pressure on inflation.
There were also concerns that the scale of military action would intensify with fears over prolonged attrition and increased civilian casualties.
US equities recovered ground during the day, but there was a significant decline in US bond yields and the dollar retreated to lows below 115.00.
China’s PMI manufacturing index edged higher to 50.2 for February from 50.1, but the no-manufacturing index secured a slightly stronger increase to 51.6 from 51.5 previously while the Caixin manufacturing index strengthened to 50.4 from 49.1 with the data overall providing an element of relief.
Asian equities were resilient, but the dollar struggled to make headway and traded around 115.00 in early Europe on Tuesday with the Euro just below 129.0.
After the flurry of rhetoric from Bank of England officials last week, there were no significant domestic developments on Monday and global developments tended to dominate. Risk appetite attempted to recover during the day which provided an element of support for the UK currency. Sterling edged back above the 1.3400 level against the dollar while the Euro recovered slightly from intra-day lows to trade around 0.8375.
Comments from Bank of England members Saunders and Mann will be monitored closely on Tuesday, especially with further upward pressure on inflation. The most likely outcome is that central bank will opt for a gradualist approach at this month’s meeting, especially given geo-political concerns, potentially dampening Sterling support. The UK currency traded above 1.3400 against the dollar on Tuesday with a net advance to 1.3430 and the Euro was close to 0.8350.
The Swiss GDP increased 0.3% for the fourth quarter of 2021 with annual growth at 3.7% and in line with consensus forecasts. The KOF business confidence index dipped to 105.0 for February from 107.8 previously and significantly below expectations.
Total sight deposits were unchanged at CHF725.2bn in the latest which again suggested that the National Bank had not intervened significantly to restrain the franc.
The franc continued to gain defensive support during the day with the Euro retreating to fresh 6-year lows below 1.0300 while dollar posted a sharp net loss to 0.9180.
The Swiss currency maintained a strong tone on Tuesday with the Euro held below 1.0300 amid underlying Ukraine fears.