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Dollar Remains Elevated as Ukraine Conflict Intensifies

Financial markets were calmer on Monday as the Dollar index stabilised near the 97.00 level and markets took stock of geopolitical developments. Officials from Russia and Ukraine held initial ceasefire talks on the Belarus border which initially lowered volatility across equities markets. The announcement of talks improved risk sentiment early on Monday’s trading session, however, the optimistic mood was short-lived as Russia ramped up its military presence in Ukraine. Following lengthy meetings on Monday lasting around 5-hours, delegations from Russia and Ukraine have agreed to meet again for a second round of talks in the coming days. Investors are also weighing up the inflationary impact and supply chain risks due to the conflict. Elsewhere yesterday, Crude oil prices extended their recent surge hovering at fresh 7-year highs with progress being driven higher by the conflict and the follow-on economic sanctions imposed on Moscow.

Looking ahead to today, investors will review the ISM’s February Manufacturing PMI on an otherwise light economic calendar. While the focus will remain firmly on geopolitical tensions, investors will pay attention to Federal Reserve (Fed) Chair Jerome Powell’s appearance in Congress on Wednesday for fresh clues on the timing and pace of interest rate hikes.

Sterling Remains Vulnerable to Risk Tends

Sterling recovers some ground against the US Dollar yesterday as the round of peace talks between Russia and Ukraine took place. The first set of talks, which were held in Belarus on Monday afternoon, ended with Kyiv slamming Russia’s ‘destructive processes’. Whilst there was little hope from the market it was a step in the right direction. The second round of peace talks between Ukraine and Russia is to be held in the coming days.

Looking to the day ahead, the market will keep a close eye on comments from Bank of England (BoE) members Saunders and Mann, especially with further upward pressure on inflation given the recent rise in oil prices. Both Saunders and Mann voted for a 50-basis point rate rise at the last meeting.

Conflict Dominates Airwaves

With no major data releases from the Eurozone, the focus remained firmly on geopolitical developments in Ukraine. Western countries announced additional sanctions against Russia with the aim to target every sector of the Russian economy, even the traditionally neutral Switzerland announcing that it would impose, and mirror sanctions previously implemented by their EU counterparts. The resulting sanctions appeared catastrophic for the Russian Rubel which plunged 29% yesterday, forcing the central bank to more than double the interest rate from 9.5% to 20% in an emergency move to protect their currency and prevent bank runs on their financial institutions.

The conflict in Ukraine has somewhat complicated the European Central Bank’s (ECB) route to hiking interest rates as Russia’s invasion poses a threat to economic growth in the Eurozone. Investors have now priced in a 10-basis point rise in September, having previously positioned bets for June.

While the focus remains on Ukraine, today offers a much busier day for Eurozone macro-economic data. German Prelim CPI for February will provide policymakers further clarity of inflationary pressures ahead of their meeting next week. We also have a plethora of February Manufacturing PMI data with the Final Eurozone Manufacturing PMI expected to confirm its preliminary flash reading of 58.4.

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