Contrasting Ukraine headlines rattle market sentiment

( 3 min )

Most currencies traded in a fairly volatile fashion on Tuesday amid contrasting headlines out of the Ukraine crisis.

ews that Russia had ordered troops into Eastern Ukraine, accompanied by warnings from the US and UK that the actions amounted to the beginning of an invasion, triggered somewhat of a risk-off mode in markets. News of western sanctions on Russia from the likes of the US, UK and Germany contributed to the worsening in market sentiment, while sending Brent crude oil prices to north of $99 a barrel for the first time since 2014. As mentioned in the past week or so, inventors are, however, not yet exhibiting full-blown panic, far from it. Russian authorities have stated that they remain open to diplomacy, and investors appear optimistic that the worst-case scenarios will be avoided.

Among the major currencies, the euro was able to recover ground on the dollar during afternoon trading on Tuesday, edging back towards the 1.135 level after yesterday’s IFO sentiment indices beat expectations. The current assessment index out of Germany rose to 98.6 this month from a revised 96.2, the sharpest increase in the measure since March last year. While the data doesn’t take into account the uncertainty created by the Russia-Ukraine crisis, it does at least reflect that business sentiment is recovering well from omicron-related concerns. As mentioned on Monday, speeches from ECB members Elderson and De Guindos will be closely watched today, with markets eager to see if recent upside surprises in Euro Area economic data translate into more upbeat assessments from Governing Council members.

Sterling also rose against the dollar on Tuesday afternoon – a move that we think has more to do with shifts in global sentiment than anything else. Bank of England MPC member Ramsden spoke yesterday, although his comments were not particularly newsworthy. He said that further tightening ‘seems likely’ in the near-term in order to prevent current high inflation becoming embedded, although there were downside risks to inflation from raising rates too aggressively. This morning will see a handful of MPC members, including governor Bailey, testify at the Treasury select committee. We will be paying particularly close attention to any clues as to the size of potential rate increases at the March Bank of England meeting and beyond.

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