News & Analysis


The pound has been more vulnerable to market risk over the last couple of days and continues to trade around lower parts of its ranges against the US dollar after hitting levels last seen in November 2020 in yesterday’s session. Its weakness comes not only in the face of a strengthening US dollar, but also as UK gas and oil prices rise at their fastest pace in over a decade. Up until last week, the weakness in European currencies was primarily visible at the other side of the channel, but the escalation in the Russian-Ukrainian conflict is starting to weigh more on sterling. At the same time, a lower print from the Like-For-Like retail sales by the British Retail Consortium added fuel to the fire as the figure came in at 2.7% – far below the market consensus of 15.2%. The UK has also moved a step further in imposing sanctions on Russia. On Wednesday, the UK announced it will restrict exports of aviation and space-related technologies and services to Russia, along with sanctions that enable the government to detain Russian aircraft in the country. On top of this, the UK will ban Russian imports of oil effective at the end of 2022 to deprive Russia of crude revenue, although this hasn’t led to much turbulence in markets as the UK retrieves most of its oil from Norway.


News that EU leaders are set to meet on March 10-11th in Versailles to outline a common stance on supranational bond issuance in order to invest in defense and energy helped the euro rise from recent multi-year lows yesterday. The single currency’s rally stalled just shy of 0.5% upon closing, as US equity markets took a late nosedive and hampered the slight improvement in the risk backdrop. A draft EU declaration, seen by the Financial Times ahead of Thursday’s informal summit, states that the meeting is designed such that the bloc “take more responsibility for our security and take further decisive steps towards building our European sovereignty, reducing our dependencies and designing a new growth and investment model for 2030”. While the details of the meeting remain unclear, the main premise is to increase investment in areas that have been fundamental gaps in the EU that Vladimir Putin has exploited. This includes investment in domestic energy creation as the European Commission plans to cut out Russian gas imports by 80% within a year. However, the plans are already inviting some opposition, mainly from Northern European countries. German Chancellor Olaf Scholz responded to the European Commission’s plans stating that it could not be achieved “overnight”, while the Dutch Finance Minister, Sigrid Kaag, told the FT that their position is “sober” and that they need to “take stock” before supporting further spending. The likelihood of additional fiscal firepower at the time when a major stagflationary shock has hit the bloc’s economy will likely dictate how currency markets trade the euro in the coming days, while tomorrow’s ECB meeting is likely going to see the central bank remain committed to providing “favourable financing conditions” during this period of economic stress. Today, there is little on the data calendar, but the euro continues to trade on the front foot as European equities go bid after Ukrainian President Volodymyr Zelenskiy said the country is no longer seeking NATO membership.


It has been a while since we have last described a weaker dollar in our morning report, but yesterday evening’s session saw the greenback mildly pare back gains after reports showed Ukrainian President Zelenskiy is dropping his push to join NATO and is open to discussions surrounding the LPR & DPR separatist regions. This has helped to stabilise risk sentiment as it may defuse tensions with Russia, which has always stated it does not want Ukraine to join NATO. On top of this, the US is effectively pushing back against the idea that polish attack aircraft could be moved to one of its bases in Germany, which also aided risk sentiment overnight. Intensified Russian forces however have kept the US dollar buoyant since. The arguably largest headline of the day, however, had a smaller impact on currency markets: President Joe Biden has banned the imports of Russian oil and gas into the US in an attempt to deprive Moscow of revenue and punish Russia over the invasion of Ukraine. The UK followed suit and plans to phase out Russian oil imports entirely by year-end, however, the EU steered clear of a complete ban and instead unveiled a plan to cut Russian gas imports by two-thirds within the next year. The market impact was less visible than in Monday’s session when talks around a US ban on Russian oil and gas pushed European currencies lower. This is because on Monday, headlines around the talks led to concerns of the EU matching the move, but with this being ruled out at the moment, FX markets were less impressed when the actual US ban was announced; only a small proportion of Russian oil and gas goes to the US and UK markets. Today’s calendar is light with US JOLTS openings perhaps providing the highlight of the day ahead of tomorrow’s US CPI release.


While the UK and US ban on crude oil can drive up oil prices further in yesterday’s session, the increase in global crude benchmarks wasn’t wildly different from that seen over the past few days. WTI, for example, failed to crack fresh highs despite rising to $130/b, while Brent similarly fell short of Monday’s high of $139.13/b. As US equities turned negative on the day, the loonie came under progressive pressure and ultimately closed the day out 0.51% lower against the dollar. This morning, with US equity futures sitting in the green following a strong performance in European equities and oil remaining stable at elevated levels, the loonie trades on the offensive. USDCAD is currently down 0.35%, retracing a large portion of yesterday’s decline, with gains likely to be extended should global equities remain firm throughout the US session.



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