Euro recovers from 20-month lows.

Ukraine headlines inevitably dominated markets during Thursday as the Russian attack on the country gathered pace on multiple fronts.

There were further missile attacks on Kyiv while Russian forces took control of the Chernobyl nuclear complex.

There were heavy and sustained cyberattacks on Ukraine from Russia.

Western countries condemned the action and imposed further economic sanctions on Russia including asset freezes on banks. There were no actions to block energy exports from Russia.

The Ukraine government asked for further assistance, but Western countries publically insisted that there would be no direct involvement.

After a measured initial response, risk appetite eroded sharply during Thursday as risk aversion dominated, and fears increased sharply.

There was strong demand for defensive assets as equity markets came under heavy selling pressure. The yen and Swiss franc gained strong support while the Euro, Sterling and commodity currencies retreated sharply. The dollar index also surged to 20-month highs on defensive demand and Euro losses.

The Western focus on financial sanctions helped trigger a turnaround in risk appetite with no move to block key commodity exports and no direct military involvement in the country.

Wall Street equities rallied to post net gains on the day which helped trigger a wider recovery as funds were forced to cover short positions in risk assets across markets.

Demand for defensive currencies faded and gold also retreated very sharply from 13-month highs. Energy prices dip sharply from highs.

European gas prices spiked over 50% higher in Europe on Thursday. On the oil market, Brent surged to a fresh 7-year high around $102 p/b with WTI also posting fresh 7-year highs near $98.0 p/b.

There was also a sharp reversal in energy prices later in the day with Brent dipping back below $100 p/b and gas prices also retreated sharply from highs amid the more measured tone, although uncertainty remained intense.

Kansas City Fed President George stated that inflation risks were to the upside, but also noted that the events unfolding in Ukraine would be taken into account when assessing how quickly accommodation should be removed.

Fed Governor Waller, however, stated that concerted action was needed to rein in inflation and there would be a strong case for a 0.50% rate hike in March if the data is exceedingly hot.

Bank of England chief economist Pill stated that inflation was uncomfortably high, but he added that the central bank would seek to bring fast-rising inflation down in a measured way that doesn’t disturb the rest of the economy.

The comments continued to dampen expectations that the Bank of England would decide on an aggressive 0.50% rate hike at the March policy meeting.

Currency market volatility has jumped over the past 24 hours. Risk conditions deteriorated sharply around the New York open amid an escalation of military conflict in Ukraine.

The Euro came under heavy selling pressure while the dollar, yen and Swiss franc gained defensive support. EUR/USD dipped to 20-month lows near 1.1100 on renewed doubts whether the ECB would tighten policy.

Sterling also posted very sharp losses with GBP/USD posting 2-month lows around 1.3275.

EUR/USD rallied to 1.1220 and held just above 1.1200 on Friday as wider demand for defensive assets faded. USD/JPY gained net ground to 115.25 GBP/USD also rebounded to above 1.3400.

Commodity currencies came under heavy pressure. AUD/USD recovered to the 0.7200 area with USD/CAD back below 1.2800 from 2-month highs around 1.2880.

Scandinavian currencies also rallied with later in the day with EUR/NOK around 10.03.

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