Market volatility was elevated this week following the dovish surprise by the Bank of Canada, simmering tensions between Russia and Ukraine, and hawkish commentary by Chair Powell following the Fed’s January policy announcement. Geopolitical tensions took centre stage at the start of the week ahead of key negotiations in Paris, but a statement by the Russian Foreign Ministry outlining how a war in Ukraine was “unthinkable” helped soothe market concerns from Wednesday onwards. The source of volatility then shifted from geopolitics to the rate space, with most of the cross-asset impact stemming from Fed Chair Powell’s hawkish comment on rates and the labour market. US front-end yields rose in the aftermath and FX markets favoured the dollar as a whole, sending the DXY index to new cycle highs above the 97 handle. Amid this environment, all eyes sat on EURUSD and EURCHF as the single currency was hampered by the rise in regional risk, and the impacts geopolitical spillovers could have on domestic energy inflation, along with rising US rates.
Next week, with the Bank of England and European Central Bank set to release policy, rate differentials will sit front of mind yet again, while North American labour market data should provide more colour on the projected rate paths for policy rates as the Omicron impact becomes measurable.
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Simon Harvey, Head of FX Analysis
Ima Sammani, FX Market Analyst