Ukraine fears keep traders on edge.

Markets continued to monitor Ukraine developments closely during Tuesday. Western countries announced financial sanctions against Russia with the threat of more action if Russia escalated the situation.

The German government also announced that it would not sanction operation of the Nordstream 2 gas pipeline which put upward pressure on gas prices.

Overall, however, there was a relatively measured stance with hopes that a full-scale invasion of Ukraine could be avoided.  There was also no move to undermine oil supplies from Russia which provided an element of relief.

Underlying tensions inevitably remained high with rhetoric continuing to be monitored very closely and US President Biden stated that a planned meeting with Putin this weekend would not go ahead.

Risk appetite initially remained under pressure on Tuesday with further demand for defensive assets, but the overall market reaction was contained amid hopes that serious damage to the global economy could be avoided.

The performance was still mixed as Wall Street equities edged lower, but bourses rallied from intra-day lows. There was a net retreat in demand for the yen and Swiss franc and equity markets moved higher in Asia. Markets were also monitoring global central bank developments closely.

According to flash February data, the US PMI manufacturing index strengthened to 57.5 from 55.5 the previous month and above consensus forecasts of 56.6. The services-sector index recovered strongly to 56.7 from 51.2 previously and well above market expectations of 53.0. There was solid growth in new orders for the month while inflation pressures intensified with goods and services prices increasing at the fastest rate on record.  There was also evidence that companies were accelerating buying plans in an attempt to beat price increases.

The much stronger than expected print for the services data underpinned confidence in the US outlook.

Bank of England Deputy Governor Ramsden stated that further moderate increases in interest rates were likely over the next few months. He did, however, emphasise that rates were not likely to rise sharply to levels of 5.0% or higher.

The comments suggested that he would not back a 0.50% rate hike at the March meeting. Markets will monitor comments from Bank of England officials closely on Wednesday with Governor Bailey and other MPC members testifying to the Treasury Select Committee.

The German IFO business confidence index strengthened to a 5-month high of 98.9 for February from a revised 96.0 the previous month and well above consensus forecasts of 96.5. The current conditions component increased to 98.6 from 96.2 while the expectations index registered a larger improvement to 99.2 from 95.8.

The IFO commented that the German economy is expecting an end to the coronavirus crisis, but supply bottlenecks continue to be a problem while rising energy prices will also be a drag on business. Firm data helped underpin confidence in the outlook.

Risk conditions attempted to stabilise during Tuesday on hopes that the Ukraine crisis could be contained, although the situation remained very fragile. The Euro recovered ground with a positive German IFO survey also providing some support. EUR/USD was able to hold above 1.1300 and settled around 1.1325.

Defensive yen demand faded slightly and there was a sharp reversal for the Swiss franc. USD/JPY traded just above 115.00 on Wednesday. EUR/CHF recovered to near 1.0450 before stabilising around 1.0425 with USD/CHF just above 0.9200.

Sterling lost ground after no hawkish rhetoric from BoE’s Ramsden, but recovered later in the day. GBP/USD found bidders below 1.3550 and settled just below 1.3600. GBP/EUR retreated from highs around 1.2030 to near 1.1990.

The Australian dollar was broadly resilient on expectations of rate hikes with net AUD/USD gains to 10-day highs around 0.7235. The Canadian dollar failed to hold gains with USD/CAD settling around 1.2750.

High energy prices boosted the Norwegian krone with EUR/NOK retreating to around 10.07. EUR/SEK also retreated to near 10.57.

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