How currencies are reacting to the latest Ukraine news

( 3 min )

The dollar was broadly weaker against most of its major peers during London trading on Thursday, despite ongoing concerns surrounding geopolitical tensions between Russia and Ukraine.

ost major currencies were able to eke out modest gains on the dollar yesterday, recovering losses incurred during Wednesday’s Asian trading hours. Warnings from US President Biden that a Russian invasion of Ukraine was ‘distinctly possible’ and could come in the ‘next several days’ spooked markets somewhat, leading to modest rallies in the safe-havens. The moves were, however, largely contained, with investors wary to take sizable positions absent any concrete news either way. As mentioned during yesterday’s report, no news has been perceived as good news, and markets were able to rebound rather swiftly following the initial move lower.

The greenback itself has come under a bit of selling pressure since Wednesday evening’s FOMC meeting minutes, although there were no real surprises of note. Most committee members were said to be in support of raising rates at a faster pace than the previous hike cycle – a no brainer given the central bank waiting a whole year between the first a second hikes in 2015 and 2016. Similarly to the bank’s communications following the meeting, the minutes indicated that a hike was on the way in March, saying that participants believed it would ‘soon be appropriate’ to start raising the Fed funds rate. The lack of mention of a rate hike larger than 25 basis points was perceived as dovish by investors, although it’s worth remembering that the meeting took place before the January inflation print and the minutes are now, therefore, woefully out of date.

One of the better performing major currencies on Wednesday was sterling, which rose back above the 1.36 level on the dollar for the first time in a week. There was no real catalyst for the extent of the move, although we assume investors were still trading off growing bets in favour of a 50 basis points rate hike from the Bank of England at its March meeting following the January UK inflation data earlier in the week. The euro has found gains a little harder to come by, which is somewhat surprising given the hawkish comments we’ve had from ECB members in the past few days. ECB committee members Schnabel and Villeroy both made the case for an end to the bank’s asset purchase programme, seen as a necessarily prelude for a hike in interest rates. In an interview with the FT, Schabel, who is one of the more influential members of the Governing Council, warned over the risks in tightening policy too late. This supports our narrative that another hawkish shift in the bank’s policy is firmly on the way when it next convenes in March.

In the absence of any Russia-Ukraine news, attention today will mostly be on a couple of other ECB member speeches from messrs Panetta and Elderson.

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