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Dollar gains strength on the prospect of more Russia sanctions

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Written by:
Myrsini Giannouli

05 April 2022
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Important calendar events

  • JPY: Annual Average Cash Earnings, Annual Household Spending, 10-y Bond Auction
  • USD: ISM Services PMI
  • EUR: French Industrial Production, Spanish Services PMI, Italian Services PMI, French Final Services PMI, German Final Services PMI, Final Services PMI, ECOFIN Meetings
  • GBP: Final Services PMI


The dollar gained strength on Monday, with the dollar index climbing above the 99 levels. Reports of escalating violence against Ukraine and increased sanctions on Russia have turned investors’ interest towards safe-haven assets once again. US treasury yields also climbed on Monday, with the 10-year treasury yields rising above 2.4%, as investors anticipate a more aggressively hawkish Fed policy.

Robust jobs data last week have also provided support for the dollar, by increasing the odds of a steeper rate hike than previously expected. This was consistent with Fed rhetoric last week, which was especially hawkish, hinting at the possibility of a bigger rate hike than the expected 25 base points. Fed members have shown signs of encouraging a more hawkish fiscal policy, increasing the odds of a 50 bp rate hike at the Central Bank’s next meeting in May. Markets are anticipating total rate hikes of 175 base points within the year to tackle soaring inflation rates.

The US Central bank is attempting to bring down inflation that has been rising at the fastest rate in 40 years and, in its latest policy meeting in March, raised its benchmark interest rate by 25 base points, bringing its interest rate to 0.50%. The 25-base point rate hike was considered conservative, but recent statements by FOMC members, show a shift towards a more aggressively hawkish policy.

ISM Services PMI data are scheduled to be released on Tuesday for the dollar and may cause some volatility in the currency. In addition, FOMC members Brainard and Williams are due to deliver speeches on Tuesday, which may affect the dollar. Over the past couple of weeks, Fed rhetoric was one of the primary drivers of the USD price, as investors scan Fed members’ statements to gain insight into the Fed’s future direction.



The Euro gained strength against the dollar last week, as peace talks sparked hopes of a resolution of the crisis in Ukraine.  On Monday however, reports of escalating Russian attacks against Ukraine boosted the safe-haven dollar, while the Euro retreated. The prospect of further sanctions against Russia has weighed down the Euro, with the EUR/USD rate falling to 1.096. If the currency pair goes up, it may encounter resistance at 1.113 and further up at 1.148, while if it declines, support may be found at the 1.080 level. 

Russia’s demands for payments of energy imports in Rubles have increased concerns of an impending energy crisis in Europe, putting pressure on the Euro. Germany has already entered the initial phases of implementing an emergency gas law, preparing for rationing gas resources among its population.

Last week, Europe’s headline inflation hit a record high of 7.5%, which may prompt the ECB to take swift action to tackle unprecedented inflation rates in the Eurozone. The ECB is trying to avert a dangerous economic effect known as stagflation, the mix of economic stagnation and high inflation rates.

ECB President Lagarde stated last week that the growth of the Eurozone economy has been stalled by the war in Ukraine and that inflation will likely rise even further. Lagarde has also stressed that the ECB needs to remain flexible and may alter its monetary policy in response to unforeseen inflationary and economic pressures arising from the war in Ukraine, but stated that the ECB will move gradually towards normalizing its fiscal policy. 

The ECB has been pursuing a more cautious fiscal policy than other major Central Banks, although it has recently turned towards a more hawkish direction, planning to wind down its bond-purchasing program in the third quarter of 2022. The European Central Bank, however, has announced that it does not plan to raise its benchmark interest rate before the end of its bond-buying program and many market analysts predict that the ECB will raise its interest rate by 30 base points or more in Q4 of 2022. As the Fed and the BOE have already raised their benchmark interest rates, the Euro remains at a disadvantage from the difference in interest rates.

Several indicators are scheduled to be released for the Euro on Tuesday, including French Industrial Production, Spanish Services PMI, Italian Services PMI, French Final Services PMI, German Final Services PMI, and Final Services PMI. These are indicators of economic health for some of the Eurozone’s leading economies and the Eurozone as a whole and may affect the currency. In addition, the Eurozone’s ECOFIN Meetings are going to be held on Tuesday and the outcome of the meetings may affect the Euro.

EURUSD 1hr chart



The GBP/USD traded mostly sideways on Monday, around the 1.311 level. If the GBP/USD rate goes up, it may encounter resistance at the 1.331 level and further up near the 1.341 level, while if it declines, support may be found near the 1.300 level. 

The sterling has lost ground against the dollar over the past few days, due to the divergence in monetary policy between the Fed and the BOE. Although the BOE started the year with a strong hawkish policy, there are signs that its stance may soften in the coming months, weighed down by a fragile economy. In contrast, the increasingly hawkish Fed rhetoric is boosting the dollar against the pound.

BOE Governor Andrew Bailey delivered a speech on Monday at the Stop Scams Conference. Bailey stressed in his speech the importance of delivering a clear message to the public regarding the BOE’s future policy. He pointed out that the joint effects of COVID and the war in Ukraine on the global economy would take some time to manifest fully and, in the meantime, the BOE would need to remain cautious. His speech was seen as dovish by investors, putting pressure on the pound. Last week, Bailey had warned that the energy crisis in the UK was going to be ‘historic’, in a speech that was again considered more dovish than expected, especially compared to the more hawkish Fed rhetoric. 

In its latest meeting in March, the BOE announced that it would raise its benchmark interest rate by 25 base points, bringing its interest rate to 0.75%. The Bank of England is shifting to a more hawkish policy and a return to pre-pandemic interest rates this year in an attempt to tackle inflation. 

UK inflation is already at a 30-year high and expected to rise further, as the war in Ukraine raises the price of key commodities and energy. The Office for Budget Responsibility has set the 2022 GDP forecast to 3.8% from 6.0% and average inflation of 7.4% for the year with a peak rate of close to 9% in Q4.  Rising commodity prices and import costs in the UK, and especially the high costs of imported energy, are driving inflation rates even higher. A tighter fiscal policy and consecutive rate hikes though may stifle the country’s economy, forcing the BOE to perform a balancing act between bringing inflation under control and allowing for economic growth.

Final Services PMI data are scheduled to be released on Tuesday for the sterling, which can provide an indication of economic health for the UK, and may cause slight volatility in the currency.

GBPUSD 1hr chart



The Yen traded sideways against the dollar on Monday, with the USD/JPY rate fluctuating slightly around the 122.6 level. The USD/JPY is still following an uptrend and if it rises further, it may encounter resistance at the 2015 high of 125.1. If the USD/JPY declines, support might be found near the 118 level and further down at 114.8. 

On Monday, the safe-haven dollar was boosted against other currencies by reports of renewed hostilities in Ukraine and the possibility of added sanctions on Russia. The Yen is also considered a safe-haven currency but has not been affected as much as other safe-haven assets by the crisis in Ukraine, and many investors have been doubting its safe-haven status. 

In the past few months, the Yen has been affected primarily by the BOJ’s fiscal policy. In its latest monetary policy meeting in March, the Bank of Japan maintained its ultra-accommodating monetary policy and did not raise its negative interest rate from -0.10%. The difference in interest rates with other major Central Banks, especially with the Fed and the BOE, puts the Yen at a disadvantage driving its price down.

The BOJ Summary of Opinions was published last week, which includes the Central Bank’s projection for inflation and economic growth and is the primary tool the BOJ uses to communicate its economic and monetary projections to investors. In the report, Japanese policymakers stated that inflationary pressures are building in Japan, with inflation growing to 1%, which is still far from the BOJ’s 2% target. Bank of Japan board members seemed skeptical about the rise in inflation though, expressing doubts on whether the rise was sustainable. They have stated that the rise in inflation rates would likely prove to be temporary and was mainly due to the rising cost of imports, especially energy-related imports. Policymakers concluded that the BOJ must continue its ultra-accommodating fiscal policy, to support the economy.

Japan’s core CPI may climb around 2% in April, similar to other countries that are expected to see a peak in inflation rates around the same time, largely due to the effect of the increase in oil prices. Japan is a net energy importer and the current energy crisis is damaging the country’s terms of trade and overall economic health. The rising cost of oil is causing goods prices to rise in Japan, with oil imports accounting for 80% of the country’s oil consumption. 

Financial indicators scheduled to be released on Tuesday for the Yen, include Annual Average Cash Earnings, Annual Household Spending, 10-y Bond Auction, and may cause some volatility in the price of the currency.

USDJPY 1hr chart



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Written by:
Myrsini Giannouli

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