Latest military assessments suggest that Russian forces have made little headway.

The main focus in Ukraine has again been efforts to allow safe-passage of civilians attempting to flee from cities surrounded and under heavy shelling from Russian forces.

The latest military assessments suggest that Russian forces have made little headway.

As far as the Western response is concerned, there is further evidence that the US in particular is very anxious to avoid escalation with reservations over plans to provide Russian-built fighters based in Poland to Ukraine.

There have, however, been further efforts to isolate Russia in the global economy with a large number of companies suspending operations in the country.

Given the major resistance to direct military involvement, efforts to isolate Russia economically and financially have been a major focus.

There will be important global geo-political and economic implications, especially if there is a prolonged conflict.

The upward pressure on food and energy prices, as well as a surge in commodity prices, is a key area of concerns for global markets.

The US Administration has had little success in persuading Saudi Arabia to increase crude production with Saudi Arabia exerting leverage over Yemen.

The surge in energy and commodity prices has also increased global stagflation fears with further upward pressure on inflation while growth forecasts will be lowered. There will also be major implications for major central bank policies.

Wall Street equities attempted to rally at times, but there was further underlying selling interest with net selling on rallies.  The S&P 500 index declined 0.7% and the lowest close for 8 months.

Oil prices remained close to 13-year highs while nickel trading was suspended after a huge spike in prices.

Stagflation fears had an important impact in undermining confidence with the relative performance likely to have important implications for currency markets.

There was strong demand for precious metals during Tuesday with risk aversion combining with stagflation fears to boost demand for defensive assets.

Gold moved well above the $2,000 per ounce level and was close to record highs of $2,070 posted in August 2020 with silver also posting net gains.

The overall US trade deficit widened to a record high of $89.7bn for January from a revised $82.0bn the previous month and above market expectations of $87.0bn for the month with an increase in imports for the month coupled with a decline in exports.

The Euro rallied ahead of Tuesday’s New York open following reports that the EU would issues bonds to finance a big increase in spending on defence and energy infrastructure. EUR/USD again rallied later to 1.0950, but failed to hold the gains and settled around 1.0915 on Wednesday. The dollar was resilient against the yen as bond yields moved higher, but with the dollar index below 21-month highs. USD/JPY settled around 115.70 on Wednesday.

Sterling was unable to make any headway as risk aversion dominated. GBP/USD continued to test the 1.3100 support area and remained close to 16-month lows. GBP/EUR declined further to 1.2000 as UK economic reservations increased.

The Swiss franc weakened again amid National Bank intervention concerns USD/CHF tested the 0.9300 area before settling around 0.9280.

Commodity currencies struggled to take advantage of high prices amid vulnerable risk conditions. Comments from Reserve Bank of Australia Governor Lowe were slightly more hawkish with a rate hike seen as feasible this year. AUD/USD settled around 0.7290 on Wednesday. USD/CAD secured net gains to 1.2900 before a retreat to 1.2865 on Wednesday.

Economic Calendar

09:00Italy - Industrial Output MM SA(JAN)-1%
09:00Italy - Industrial Output YY(JAN)5.00%4.40%
21:45NZD Electronic Card Retail Sales (M/M)(JAN 08)3.00%
21:45NZD Electronic Card Retail Sales (Y/Y)(JAN 08)5.70%

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.