Biden warns over non-conventional weapons.

There were no positive developments surrounding the Ukraine conflict during Monday with Western assessments that the Russian advance was broadly stalled.

Ukraine President Zelensky stated that a meeting with Putin was not realistic at this stage, but did state that he was prepared to discuss a commitment not to join NATO.

US President Biden warned that there was an increased risk that Russia would resort to non-conventional weapons and warned over potential cyber-attacks on the US.

Fed Chair Powell stated that there is an obvious need to move expeditiously to a more neutral level of interest rates and more restrictive levels if needed to restore price stability.

Powell also noted that the Fed might well conclude that it needs to go faster.

According to Powell, the Ukraine war may have a significant impact on the global economy, but the situation is highly uncertain and Fed projections could become out-dated very quickly. Overall expectations of a 0.50% rate increase at the May meeting intensified.

As far as the balance sheet is concerned, action could come at the May meeting, but no decision has been made.

Following Powell’s hawkish rhetoric there was further selling pressure on Treasuries and there was a surge in bond yields. The 10-year yield increased sharply to near 2.35% and the highest reading since May 2019.

Global yields also moved higher which had some impact in limited relative currency moves, but the dollar posted net gains.

The surge in US bond yields had an important impact in boosting the dollar and was crucial in undermining the yen amid expectations that the Bank of Japan would maintain a very accommodative policy. USD/JPY surged to a fresh 6-year high at 120.50 with the yen also losing ground on all the main crosses as it was used as a funding currency. There was also net selling pressure on the Euro and Swiss franc.

Reserve Bank of Governor Lowe maintained a relatively dovish stance with comments that the central bank would not raise interest rates until there is clear evidence of pervasive price pressures.

He did add that the bank is monitoring the labour market closely and assessing how severe supply-side pressures will be.  Australian yields moved higher despite the dovish remarks.

The dollar was supported by hawkish Fed rhetoric during the day, especially after Powell’s warning over the potential for larger rate hikes. The Euro gained an element of protection initially from hawkish rhetoric from Bundesbank head Nagel. EUR/USD, however, drifted lower and dipped below the 1.1000 level on Tuesday with lows at 1.0960.

US yields moved higher with the 10-year yield near 2.35% which boosted the dollar. USD/JPY secured a net advance to 6-year highs at 120.50 as yield-trends were decisive. USD/CHF posted net gains to 0.9360.

Sterling was resilient as UK yields also moved higher. GBP/USD tested 1.32 but failed to hold this level and retreated sharply to 1.3120 as the dollar surged. GBP/EUR rallied slightly to 1.1950 with GBP/JPY at 5-month highs above 158.0.

Commodity currencies failed to hold intra-day highs as the dollar strengthened but held firm on the crosses. AUD/USD failed to hold 0.7400 and settled around 0.7390. USD/CAD dipped to 1.2570 before settling just below 1.2600.

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