Risk appetite takes a dive.

Ukraine headlines have continued to dominate during the past 24 hours. During Tuesday, there were strong expectations that Russian forces would look to step-up their attacks on the main cities including Kyiv while there was further strong fighting in the second city of Kharkiv.

Reports suggested that the city of Kherson n Southern Ukraine had been captured by Russian forces.

US President Biden announced the banning of Russian planes from US airspace while Boeing and Apple announced they would suspend doing business in Russia. There were reports that China had offered to act as a peacemaker.

There were increase concerns that the West could target Russian oil supplies and fears over a prolonged conflict which would disrupt the global economy. There was also increased pressure for NATO to enforce a no-fly zone over Ukraine which would represent a major escalation.

High volatility remained a key feature across asset classes during Tuesday. Overall risk appetite deteriorated amid fears over a prolonged conflict and a negative impact on the world economy.

Equities posted sharp losses while there was renewed demand for defensive assets.

The yen, Swiss franc and dollar were in demand while the Euro came under strong pressure amid a further downgrading of ECB expectations. The trend continued on Wednesday with a rally in US equity futures fading quickly.

Oil prices spiked to fresh 7-year highs during Tuesday with fresh unease over global supplies. A planned release of strategic oil reserves failed to calm markets with a fresh surge in early Europe on Wednesday.

There is a planned OPEC meeting on Wednesday with rhetoric monitored closely, especially as actual production has been running below planned levels. Markets will be sceptical over any promises of increased production unless there is actual evidence of higher output.

The US ISM manufacturing index strengthened to 58.6 for February from 57.6 the previous month and above consensus forecasts of 58.0. There was a slightly faster rate of production growth for the month and a stronger increase in the rate of growth in new orders. Employment increased at a slightly slower rate on the month while supply-side difficulties increased. Prices increased at only a slightly slower rate of growth for the month. Markets, however, priced out the possibility of a 0.50% rate hike in March.

Saunders backs further BoE rate hikes, markets more scepticalBank of England MPC member Saunders stated that the risks are on the side of stronger and more persistent inflation and that prompt tightening now could help limit the total scale of tightening that will be needed. He opposed running the economy hot and an increase in inflation expectations would be costly to reverse.

Fellow MPC member Mann stated that it was vital to curb inflation expectations. Markets, however, continued to scale back expectations with futures indicating a 90% chance of a 0.25% rate hike and 10% chance of no change.

The Euro was undermined by fears over the impact of the Ukraine crisis with increased concerns over the Euro-zone outlook. Markets continued to lower ECB tightening expectations for this year. The dollar overall posted net gains under the influence of Euro and Sterling weakness. The dollar index held just below 20-month highs as US futures also indicated that a 0.50% Fed rate hike was off the table for this month.

EUR/USD dipped to 21-month lows below 1.1100 with a recovery attempt fading quickly. USD/JPY was held close to 115.00 as US yields declined and the yen gained defensive support.

EUR/CHF slumped to fresh 6-year lows near 1.0200. Sterling was hampered by weaker risk conditions and a dialling back of interest rate expectations. GBP/USD dipped to near 1.3275 on Wednesday and close to 2022 lows.

Commodity currencies retreated from intra-day highs as equities came under sustained pressure, but maintained a firm overall tone on strength in commodity prices.  AUD/USD settled around 0.7250. USD/CAD consolidated around 1.2740 ahead of Wednesday’s Bank of Canada policy meeting with markets expecting a 0.25% rate hike.

Economic Calendar

Expected Previous
08:55 German Unemployment Change(M/M)(FEB) -48K
08:55 German Unemployment Rate(M/M)(FEB) 5.20% 5.10%
10:00 Euro-Zone CPI (Y/Y)(FEB) 4.40% 5.00%
13:15 USD ADP Employment Change(FEB) -301K
15:00 CAD BoC Rate Decision 0.25% 0.25%
19:00 USD Federal Reserve's Beige Book

*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.