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Sterling Slides as Officials Continue to Cool Expectations

Before this morning’s moves we saw Sterling on the backfoot as comments during the Treasury Select Committee tried to cool market expectations on the path of interest rates. Bank of England (BoE) Governor Bailey stated that second-round effects very clearly pose a risk to inflation. However, he also stated that markets should not get carried away about the likely scale of interest rate increases. This has been a common theme over the past couple of weeks.

Overnight we have seen Sterling slide against the US Dollar as risk aversion returned to the market following Russia’s invasion of Ukraine. The UK will respond decisively to Russia’s “unprovoked attack” on Ukraine, Boris Johnson has said.

Looking to the day ahead, Governor Bailey will kick off the BoE’s two-day conference on monetary policy. The conference ‘will bring together academics, practitioners and policymakers to discuss monetary policy instruments and the new strategy questions that central banks are facing’. In terms of economic data, the UK CBI distributive trades survey will provide an early look at retail activity in February.

Dollar Surges as Risk Sentiment Falls Over Rising Ukraine Tensions

The US Dollar surged overnight on Wednesday as Russian President Vladimir Putin announced Russia would launch a military operation on Ukraine. The latest developments suggest the Russian military is heading towards the Ukrainian border from Belarus, with further reports of Russia unleashing cyber-attacks on Ukraine. Trading during the Asian session saw risk-off appetite increase, resulting in a sudden flight to safety and flows into traditional safe-haven currencies such as the US Dollar, Swiss Franc and Japanese Yen. The Dollar index surged higher to above 96.50 and the benchmark 10-year US Treasury yield fell by around 5% with US stock futures falling by over 2%. Cryptocurrencies also fell sharply during the day, with Bitcoin dropping to its lowest level for a month. President Biden condemned the attack and is expected to meet with G-7 leaders today where he is expected to announce further consequences and sanctions that the West is likely to impose against Russia.

Elsewhere yesterday, Federal Reserve (Fed) official Michelle Bowman commented that Fed policymakers will review upcoming data in deciding whether a 50-basis point hike may be needed at the Fed’s March meeting to combat persistent inflation.

Ongoing developments in Ukraine will continue to dominate financial markets today. Later in the day, the US Bureau of Economic Analysis will release the second estimate of US Q4 GDP. Later in the session, New Home sales will draw attention, along with weekly jobless claims data.

Single Currency Slide as Russia Invades

The German GfK Consumer Climate index, a measure of consumer confidence and a leading indicator of consumer spending, retreated to -8.1 for February. The reading undershot the -6.2 market expectation and January’s -6.7 as confidence weakened due to surging energy prices. Final CPI year-on-year reported in line with expectation at 5.1% for January as did the Final Core rate which remained unchanged at 2.3%.

Markets remain focused on the Russia/Ukraine developments with reports this morning confirming fears that Russia is launching an offensive in the Donbas region. There have also been reports of Russian military units entering Ukraine from several different positions including Belarus. Missile strikes and explosions have also been confirmed including within the capital city, Kiev, and military airfields throughout the country. We have started to see a greater shift in risk appetite with the US Dollar making gains against the Euro as investors continue risk-off moves towards safe-haven currencies.

Looking ahead at today, the main focus for financial markets will remain on geopolitical developments in Ukraine. There is no significant data from the Eurozone to provide support to the single currency.

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