Global inflation fears intensify.

The military developments in Ukraine continued to indicate a withdrawal of Russian forces from northern areas with an attempt to re-focus on the South and East in an attempt to gain control of the Donbas. The withdrawal of forces, however, has increased the focus on allegations of war crimes against civilians around the Kyiv area.

Pressure for additional sanctions on Russia has increased with further demands that European countries stop importing Russian energy.

In this environment, the Euro was vulnerable given the Euro-zone exposure to Russian energy shipments.

Given developments in Ukraine and supply pressures on commodities, fears over higher inflation also continued to increase, especially with fears over the impact of a lockdown in Shanghai.

Difficulties for global central banks will, therefore, also tend to intensify.

The Reserve Bank of Australia (RBA) held interest rates at 0.10%, in line with expectations.

There was, however, a hawkish shift in the statement with comments that inflation has picked up and a further increase in expected.

The bank also noted that the labour market is tight and wages growth is likely to accelerate.

The RBA stated that it has wanted to see evidence of inflation sustainably in the target range with the change in tense suggesting that the conditions have been met. The Australian dollar jumped higher after the statement with AUD/USD above 0.7500.

In comments on Monday, Bank of England Deputy Governor Cunliiffe stated that the Ukraine crisis will intensify and prolong the surge in inflation and tighten the squeeze on household incomes. He added that companies do not have the same bargaining power as in the 1970’s and he was not convinced that there was a need to lean heavily and constantly against an embedding of an inflationary mind-set.

The overall rhetoric was broadly dovish, although this would have been expected to some extent given that he voted against the March rate hike.

The headline Bank of Canada business survey was slightly weaker than the previous one, but there was strong evidence of capacity constraints with a record 81% of companies reporting problems.

There was also further upward pressure on costs with expectations that the Bank of Canada would sanction a 0.50% rate hike at the April policy meeting.

Bank of Japan Governor Kuroda stated that recent forex moves have been somewhat rapid and hinted that there could be intervention to slow the decline, although he stated that it was hard to gauge the impact. The comments stifled potential yen selling.

Unease over the Ukraine situation continued to sap Euro support during Monday, especially with fears that allegations of war crimes against Russia would make it even less likely that peace talks would make headway.

There were also further concerns surrounding energy supplies and prices which undermined the Euro. EUR/USD weakened gradually to lows around 1.0960 and failed to recover significantly on Tuesday.

US 2-year yields edged lower which limited potential dollar buying. Bank of Japan Kuroda’s comments also curbed yen selling. USD/JPY was held below the 123.0 level and retreated to bear 122.50.

The Swiss franc strengthened despite evidence of increased National Bank intervention with Ukraine fears providing support. EUR/CHF dipped below the 1.0200 level.

Sterling was resilient despite dovish rhetoric from Bank of England’s Cunliffe. GBP/USD found support below 1.3100 and traded above this level on Tuesday. GBP/EUR posted sharp gains to 1.1950.

Commodity currencies posted net gains despite a stronger US currency. The Australian dollar spiked higher after a more hawkish Reserve Bank statement. AUD/USD jumped to 9-month highs just above 0.7600. The Canadian dollar did encounter profit taking and USD/CAD held above key support to trade around 1.2480.

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