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Sterling Slides on Risk Aversion and Dampening Rate Prospects

Yesterday we saw risk aversion in the markets as Russia invaded Ukraine. The UK has since issued a raft of sanctions as part of a coordinated effort to bring Russia back to the negotiating table.

Compounding Sterling’s move lower were comments from Bank of England (BoE) Chief Economist Pill. Pill stated that inflation was uncomfortably high, but he added that the Central Bank would seek to bring fast-rising inflation down in a measured way that doesn’t disturb the rest of the economy. His comments are on par with other members who are dampening expectations of an aggressive path for interest rates. However, this rise in the price of oil yesterday is likely to only push inflation higher.

Looking to the day ahead, BoE Chief Economist Pill is scheduled to give closing remarks on the final day of the Bank’s annual conference on the monetary toolkit. However, the market will be focused on the developments within Ukraine.

Russian Invasion Drives Flight to US Safe Haven

Safe-haven flows continued to dominate financial markets on Thursday as investors took stock of the latest developments in Ukraine and risk-sentiment continued to fall. The early market reaction on Thursday saw the US Dollar surge higher against the majority of its major trading pairs. US Stock futures fell sharply early in the day and the Pound and Euro fell to multi-month lows against the Greenback as the Dollar Index climbed to above 97, its highest level since June 2020. Financial markets appeared to stabilise later in the session, however, following US President Joe Biden’s announcement of further sanctions against Russia. Western sanctions imposed focused on financial measures and individuals with no movement at this stage to block commodity exports. 

Elsewhere yesterday, Federal Reserve (Fed) Official Christopher Waller said he still believes a 50-basis points hike in March is a possibility if key economic data is reported above expectations. Meanwhile, Federal Open Market Committee (FOMC) member Thomas Barkin commented that it’s time for the Fed to normalise rates, given a robust labor market, strong demand across the economy and high inflation rates.

Looking ahead to today, financial markets are again expected to monitor developments in Ukraine as the primary market driver ahead of the weekend. In the US, Personal Consumption Expenditures (PCE) Price Index is scheduled for release later in the session ahead of the weekend.

The Single Currency Weaken on Risk Aversion

With no significant data releases from the Eurozone yesterday, Euro watchers focused on the escalating developments within Ukraine as Russia launched a large-scale military attack on the independent sovereign state. Selling pressure on the Euro ensued as investor concerns surrounding the economic impact on the European bloc increased as Russian troops advanced towards the Ukrainian capital city. Europe is now on very high alert and, in harmony with the NATO alliance, is looking to bolster security in the continent in case of an expansion of Russian aggression in neighbouring states.

The risk-off sentiment across financial markets was evident in equity markets with the Euro Stoxx 50 falling by 3.6% with bond market yields moving lower with the German 10-year Bund yield falling by 5bps to below 0.2%. This however seems marginal compared to the MOEX index (Moscow Exchange) which plunged by 45% before recovering slightly, wiping out approximately $70 billion off the value of Russia’s biggest companies. Financial markets will continue to monitor developments in Ukraine with further risk-off movements likely.

Looking ahead to today, European Central Bank (ECB) President Lagarde is due to hold an online press conference regarding Russia’s invasion of Ukraine this afternoon. Elsewhere, French Prelim CPI month-on-month (m/m) data was released this morning exceeding a consensus reading of 0.7% versus a 0.4% expectation and a previous figure of 0.3%. French Prelim GDP m/m read in line with expectation at 0.7%. German Final GDP quarter-on-quarter has also been released this morning and read above forecast, showing a decline of 0.3% versus an expectation of a 0.7% contraction to German economic output.

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