News & Analysis


Despite yesterday’s broad USD bid due to the downturn in market risk sentiment, the pound remained relatively unimpacted and continued to trade in recent ranges against the greenback. This resulted in a slight uptick in GBPEUR as it heads towards multi-year highs posted earlier in the month. GBPUSD’s solidity around current levels is notable and is likely due to expectations of continued rate hikes by the BoE in the coming months. Expectations of continued policy tightening are likely to be confirmed after this morning’s labour market data for Q4, the first piece of a string of economic data due out this week, highlighted the little impact Omicron had on employment levels. The positive labour market data, which saw nominal total wage growth rise slightly and the unemployment level hold steady at 4.1%, had little impact on the pound, however, as most of the encouraging signs have already been priced in by markets. With nothing else due out of the UK until tomorrow’s more crucial CPI data, the pound is likely to remain sensitive to the broad US dollar moves in markets, which continues to be flung around by headlines over the Russia-Ukraine situation.


Geopolitical tensions continued to weigh on the euro in yesterday’s session which sent EURUSD to a 1.5 week low while the euro also weakened against GBP. Markets remain on edge after Ukraine’s Volodymyr Zelenskiy’s sarcastic comment about a potential Russian invasion on Wednesday, although the euro has been very mildly recuperating losses this morning. February’s German ZEW survey – a survey that includes roughly 350 economists’ views – is on the agenda for today at 10:00 GMT, and is likely to reflect reduced virus concerns more so than heightened regional risks. The market impact is likely to be fairly light given markets’ focus on broader themes, however, it will still serve as an indicator of overall sentiment in the eurozone.


The dollar remained on the front foot in yesterday’s session as markets focused heavily on pricing a slight increase in geopolitical risk as developments over the weekend showed a deterioration in diplomatic relations, while front-end yields continued to rise on expectations of a more aggressive series of near-term Fed hikes. Firstly, on geopolitics, the continued “narrative war” which is playing out in the media saw the US signal that a Russian invasion of Ukraine was imminent over the weekend, while on Monday the US embassy in Kyiv was closed. Calls by Western officials that a Russian invasion is likely in the coming days is stirring market sentiment, however, the limited reaction in FX markets is notable. Yesterday, EURCHF, the canary in the coal mine for regional risk events, dropped by half a per cent, however, it still remains a full percentage point above lows printed earlier on in the year. In other safe havens; USDJPY failed to post a meaningful drop that one would associate with traders positioning for a substantial deterioration in risk appetite, while the dollar’s bid was mild against high beta currencies. Even regional currencies, such as RUB and PLN failed to post losses on the day. In this respect, a substantial deterioration in the Russia-Ukraine crisis still has some distance to play out in the FX space, but markets aren’t exactly pricing it as their base case scenario just yet. On the rates side, the dollar continues to be supported at the margin by rising speculation that the Fed will hike by 50bps at their March meeting. OIS pricing saw short-term interest rate traders still price in an above 50% probability of a 50bps hike despite more moderate Fed communications in the media over the past few trading days. Today, only PPI data is due out of the US, but is unlikely to have a sizable market impact as most of the inflation signal has already been delivered by last week’s CPI release. Instead, markets will focus heavily on geopolitical events in eastern Europe when pricing the broad dollar, with German Chancellor Olaf Scholz set to meet Vladimir Putin in Moscow today.


The loonie was one of the few currencies that managed to reverse course and pare back losses against the US dollar around the start of the US open, as crude prices made a comeback and supported the petro-linked Canadian dollar. This was despite the recovery in the US-Canadian 2Y yield spread as US yields held onto increases vs their Canadian counterparts. On today’s calendar is housing starts data from January at 13:15 GMT today, which will be watched by markets following the stark rise in house prices in Canada and the unexpected absence of a rate hike in January’s Bank of Canada meeting which further stoked inflation fears. Geopolitical tensions between Russia-Ukraine and their implications for the oil outlook are also likely to be a driving factor in today’s session.


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