News & Analysis


The pound fell 1.2% against the dollar and 0.26% against the euro in yesterday’s trading session as the broad risk-off market move took a toll. The increase in inflation pressures coming from energy markets raised concerns around domestic growth conditions as inflation was already set to reduce household real incomes by the largest amount in 30 years this year. This resulted in money markets continuing to trim bets of a 50bps hike by the BoE in March as such a move would further restrict growth. Calls from 10 Downing Street to eject Russia from the SWIFT messaging system only emboldened sterling bears, but the more modest wave of new sanctions and the corresponding increase in energy exports from Russia this morning has helped stabilise risk sentiment this morning. The pound is faring a lot better than G10 counterparts today as UK natural gas futures for March 2022 fall over 17.6% following the 50% rally yesterday. While the focus remains on geopolitical events and the broad market reaction, economic events are still scheduled in the UK. This morning, the February GfK consumer confidence measure fell from -18 to -26 as households braced for the erosion in purchasing power coming from inflation in the following months. Meanwhile, Chief Economist Huw Pill is set to close the Bank of England’s first annual research conference today at 18:00 GMT.


EU member states met on Thursday and reached an agreement on a package of sanctions against Russia in an aim to paralyse the Russian economy, but stayed away from a unanimous vote to cut Russia off of the SWIFT global payment system. The current package of sanctions affects Russia’s energy and transport sectors along with the financial sector. Exports of crucial technologies that would enhance Russia’s military or technological capacity are blocked, while Russia’s access to some EU financial services is limited. State-owned companies are barred from listing new shares on the bloc’s exchanges, and visa-free travel for Russian diplomats is suspended. The details of the package will be worked out today after which European foreign ministers will sign. Earlier reports already suggested the EU won’t reach an agreement on the SWIFT dilemma as of now, especially with Germany and Italy being opposed to cutting off Russia’s access to SWIFT at this point, however, such a step could still follow at a later stage. Eastern European countries were pushing for a decision on SWIFT, along with the UK, but EU member states remain divided due to the implications it would have on energy and inflation.


As Russian troops continued to advance further into Ukraine yesterday, the magnitude of the flight to safety increased. Market participants eagerly awaited news of the sanctions from western nations as this would prove the next determining factor as to how bad the potential global economic impact could be. Meanwhile, the US pledged military support to Nato for bordering alliance countries, but military intervention in Ukraine was repeatedly ruled out. In the evening in Europe, President Biden took to the lectern to outline the second tranche of sanctions against Russia. Expanding on Tuesday’s announcement that saw five Kremlin-connected elites sanctioned and restrictions on new sovereign debt issuance, the latest round of sanctions restrict US financial institutions from doing business with Russia’s ten largest financial institutions, further restrictions on debt and equity, and sanctions on technology exports to Russia. The move by the US cuts off access to around 80% of Russian financial assets and cuts off around half of Russia’s technological imports. However, the latest round of sanctions stopped short of the “nuclear” financial options, such as imposing sanctions on Russian energy companies, Russian exports or banning the nation from the SWIFT network. All of which were deemed to have too large of an economic impact on alliance nations as it would lead to a further rise in energy and commodity prices that would inflate the inflationary shock and dampen growth further. By avoiding sectors that are deemed “systematically important to the global economy”, natural gas futures in Europe this morning are moderating and are aiding a recovery in risk appetite. WTI is now trading back below the $100 mark, while European equity futures point to a mild rebound. Outside of Russia-Ukraine, Fed official Christopher Waller said if inflation readings come in hot, a “strong case can be made for a 50 basis point hike in March”. The Fed Governor outlined his stance that rates should rise by 100bps by midyear, either with a larger initial hike or four successive 25bps hikes. This drove home the narrative to markets that current geopolitical events are only likely to embolden the Fed to tighten policy as upside inflation risks arise. The combination of a tentative risk backdrop and expectations of a more hawkish Fed should keep the dollar well supported today.


Rising oil prices and a stabilisation in US equities towards the end of the day combined with the rise in oil prices to help the loonie trim losses against the dollar. The Canadian dollar fell only 0.64% against the greenback in yesterday’s session, which was a limited move when compared with the rest of the G10. Canada’s second tranche of sanctions was announced yesterday as well and includes financial penalties against 58 individuals and entities and the halting of all export permits – new and existing. With the data calendar empty in Canada until next week, price action in USDCAD will be driven by broader market pricing of geopolitical events and potentially positioning ahead of next week’s Bank of Canada meeting.



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