News & Analysis


The pound fell yesterday morning and reversed Monday’s gains despite the rest of the G10 currency board trading a fair bit stronger against the dollar as the rhetoric around sanctions became milder. Commentary from Bank of England Deputy Governor Dave Ramsden was the sole idiosyncratic driver of the pound’s losses against both USD and EUR yesterday. Ramsden said the UK is likely to need “modest” tightening in interest rates and stressed the Bank rate won’t look anything like the BoE’s pre-2007 levels of 5% and above. This is a marked turnaround from the MPC member after he voted for a 50bps hike back in February. Ramsden’s explanation that his decision to vote for 50bps was “finely balanced” and that he expects “modest tightening” ahead suggests he will vote for 25bps increments going forward. This weighed on market expectations of interest rate hikes, with the probability of a 50bps rate hike in March falling from 40% to around 30% since yesterday. Today, the pound’s focus remains on monetary policy as BoE Governor Andrew Bailey and Deputy Governor Ben Broadbent are joined by MPC members Tenreyro and Haskel as they testify to parliament’s Treasury Committee at 09:30 GMT.


While yesterday morning saw the euro trade mostly in the red against the G10 following the headlines around Russia-Ukraine, sentiment around the single currency improved throughout the day, with EURUSD and EURCHF rising close to Monday’s highs before the moves came down slightly again. On the monetary front, European Central Bank’s Robert Holzmann spoke to the Swiss newspaper NZZ this morning and stated the ECB should implement its first rate hike “in the summer”, with a second hike coming by the end of 2022. With Holzmann being one of the more vocal hawks among the governing council, the comment around the rate lift-off had little market impact, however, his views on sequencing are something that policymakers haven’t shared publicly yet. Holzmann stated the ECB could begin increasing rates before ending its bond purchasing programme, challenging the ECB’s long-held view on the sequence of its upcoming policy moves as the ECB has always signalled a rate hike should not take place until shortly after the end of asset purchases. While many other central banks share the view that raising rates before ending bond-buying is counterproductive, it may be a different discussion for the ECB as their one-size policy affects the entire bloc including different economies, and this would allow them to keep sovereign spreads narrower while also trying to keep a lid on inflation.


After President Putin acknowledged Russian separatists and ordered troops to protect them within the Donbas region, the market risk-off move was short-lived. Unlike US equity markets, FX markets soon rebounded and began to rally against the dollar as western officials progressively softened their rhetoric on the extent of retaliatory sanctions. The UK was the first major western nation to announce its wave of sanctions, with just three Russian billionaires close to Putin and five Russian banks in the firing line. The limited scope of the sanctions was an attempt by western allies to avoid inflating the situation in order to keep diplomatic channels open and the reaction across multiple markets was telling. European gas futures barely flinched at the headlines of imminent sanctions, while highly exposed currencies like SEK and EUR actually rallied against the dollar over the course of the day. Overnight, President Biden announced the US sanctions on Russia, which are much broader and more impactful on the Russian economy than the UK’s. The latest package from the US includes sanctions on two major Russian banks and on the country’s sovereign debt issuance, meaning the country can no longer raise money from the West and trade new debt on US or European markets. Similar to the UK sanctions, the US raft stopped short of the wide sweeping and severely damaging measures that were initially threatened, such as excluding Russia from the SWIFT system. Without any countermeasures being announced from Russia, such as restrictions on European energy exports, the market impact has been isolated solely to Russian assets thus far. In the G10 space, the dollar is broadly softer this morning against all currencies, while NZD outperforms following another successive hike from the RBNZ. With the EU still set to announce their tariffs and no response yet from Moscow, incoming geopolitical headlines are likely to still dominate broad market price action today.


The Canadian dollar broadly tracked oil markets in yesterday’s session as the rise in WTI to a recent high of $96 offset the decline in US equity markets. However, as the day transpired, the rally in oil markets began to moderate as signs of more targeted sanctions became visible. This reduced the possibility of Russia’s commodity exports being restricted on international markets, with the US sanctions decision ultimately focusing on sovereign debt issuance instead. With oil back to its opening price of $91 per barrel and US equities trading in the red, the loonie began to take on water in a session that was largely characterised by broad USD weakness. This morning, however, the loonie has reversed yesterday’s losses and then some as US equity futures sit in the green and the market risk backdrop is well supported. Despite the announcement of most sanctions, geopolitical headlines can still shift the overall market dynamic quite quickly. It is notable that the loonie was sheltered by the rising oil price during a more risk-off period, however.


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