Ukraine headlines keep markets on edge.

Markets have continued to react to headlines on the Ukraine situation as underlying tensions remains high.

NATO officials have continued to warn over a further build up Russian forces near the Ukraine border with further flare-ups in Eastern Ukraine.

On Sunday, US President Biden warned that he was convinced that Russian President Putin had already decided to invade Ukraine. Risk appetite remained on the defensive in early Asia on Monday, but there was a significant recovery later in the session following reports that there could be a summit meeting between Biden and Putin.

Overall risk appetite deteriorated during Friday, especially with position adjustment ahead of the weekend with equities moving lower and renewed gains for precious metals.

After further vulnerability in early Asia, there was a recovery in risk later in the session and weaker demand for defensive assets.

Equities recovered some ground with US futures around 1.0% higher and there was a retreat for the yen and gold while the Euro regained ground. Trading conditions will inevitably remain volatile in the short term as Ukraine headlines dominate risk conditions.

In comments on Friday, Chicago Fed President Evans stated that policy had been wrong-footed on inflation, but may not need to become restrictive and he still expects that much of the inflation is due to supply and pandemic shocks which will ease.

New York Fed President Williams stated that he expects it will be appropriate to raise rates in March, but there were no indications whether he would back a 0.25% or 0.50% rate increase. Fed rhetoric will continue to be monitored closely in the short term ahead of the important March meeting.

Japan’s PMI manufacturing index declined to a 5-month low at 52.9 from 55.4 previously with sharp upward pressure on costs while the services sector contracted at the fastest rate since May 2020.

In contrast, there was a strong rebound in Australia with the manufacturing index at 57.6 for February from 55.1 in January while the services-sector index rebounded to 56.4 from 46.6 as coronavirus restrictions were eased. A re-opening of the Australian border also helped underpin Australian sentiment.

There will be European PMI releases on Monday while US data will be delayed until Tuesday due to Monday’s US holiday.

The latest COT data released by the CFTC recorded an increase in long, non-commercial positions to near 48,000 and the largest long position since August 2021 while there was also a move to a small net long Sterling position for the first time since November.

Risk conditions remained fragile during Friday and confidence gradually ebbed away, especially with caution ahead of the weekend.

The yen gained fresh defensive demand with USD/JPY testing support below 115.00. The dollar also gained an element of defensive support. US yields gradually edged lower as equities moved lower with the 10-year yield near 1.92%.

The Euro was undermined by Ukraine concerns and EUR/USD dipped to lows around 1.1320. There was a reversal later in Asia on Monday with hopes of diplomatic progress surrounding Ukraine.

USD/JPY was held near 115.00 despite a risk recovery and EUR/USD rebounded to 1.1370.

GBP/USD regained 1.3600 amid a dollar correction weaker as Sterling sentiment held firm. GBP/EUR retreated from 1.1200.

Commodity currencies gradually lost ground on Friday as equities lost traction but recovered on Monday. AUD/USD found support below 0.7200 and traded near 0.7220 on Monday as firm PMI data supported confidence. The Canadian dollar struggled on the crosses with USD/CAD around 1.2725 on Monday.

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