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Ukraine crisis to affect EU inflation, currencies

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Written by:
Myrsini Giannouli

08 February 2022
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Important Calendar Events

  • JPY: Average Cash Earnings, Household Spending, Bank Lending, Current account
  • GBP: BRC Retail Sales Monitor
  • EUR: French Trade Balance, Monthly Italian Retail Sales
  • USD: NFIB Small Business Index, Trade Balance, IBD/TIPP Economic Optimism

The world is holding its breath, as diplomatic efforts intensify in order to prevent an escalation of the crisis Russia - Ukraine. It is reported that Russia has amassed over 120,000 troops on the Ukrainian border, as well as military hardware and medical supplies, and the pentagon warns that an invasion seems imminent. Russian President Vladimir Putin however, last week denied plans to attack Ukraine and accused the US of using Ukraine as a tool to contain Russia. 

There was renewed diplomatic activity on Monday, attempting to diffuse the crisis peacefully. After British PM Boris Johnson, who visited Kiev last week, the French President Emmanuel Macron is taking a leading role in the negotiations. Macron is meeting his Russian counterpart, Vladimir Putin in Moscow on Monday, in a bid to avert an invasion of Ukraine. The French President has stated that he is aiming for a “dialogue with Russia and de-escalation” and after negotiations with Russia on Monday, he will visit Kiev on Tuesday. Also, the German, Czech, Slovak and Austrian foreign ministers are meeting in Kyiv on Monday and the new German chancellor, Olaf Scholz, is scheduled to meet US President Joe Biden to discuss the Russian-Ukraine crisis.

The EU threatens Russia with heavy economic and trade sanctions in the event of an attack against Ukraine, which might backfire though, and have a heavy impact on the Eurozone. The EU relies on Russia for key commodities, such as wheat, natural gas and oil, and the price of these goods is already increasing. A disruption in importing these commodities would likely result in rising prices, creating an energy crisis and further increasing inflation rates in the EU. European Commission President Ursula von der Leyen stated on Monday that the EU is attempting to build a partnership for energy security with the US and other Natural Gas suppliers, in an attempt to mitigate a potential energy crisis and shield EU consumers and households from energy shortages. 

USD

The dollar fell heavily last week, after climbing to its highest level in over a year in the wake of the Fed’s monetary policy meeting. The dollar index had climbed as high as 97.25 after expectations of aggressive rate hikes, but fell to 95.14, as traders digested the FOMC statements and it became clear that the US Central Bank is planning to raise interest rates and tighten monetary policy at a more moderate pace. 

On Monday, the dollar index fluctuated between 95.36 and 95.62, showing low volatility as traders await the release of Important financial indicators later this week to gauge the frequency and aggressiveness of future rate hikes.

Economic indicators that may affect the dollar on Tuesday, include: Unemployment Rate, Non-Farm Employment Change and Average Hourly Earnings. These are minor indicators of economic conditions and trade activity in the US and may cause slight fluctuation in the currency. The Federal Reserve will rely on financial indicators in the coming months to assess economic and employment conditions in the US in order to move towards a more hawkish fiscal policy in a way that will be sustainable by the US economy. 

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EUR 

The EU Central Bank in its policy meeting last week, kept its interest rates unchanged and continued its ultra-accommodating monetary policy, as expected. The ECB Monetary Policy Statement, though, contained hints that the bank might eventually start moving towards a less dovish policy and the Euro spiked following the ECB’s statement. Mounting inflationary pressures in the EU seem to be finally catching up with the ECB, which might be forced to tighten its monetary policy within the year.  

The EUR/USD rate was catapulted to 1.145 last week as the Euro gained strength and the dollar weakened, but traded sideways on Monday, around 1.144, with very low volatility. If the currency pair goes up, it may encounter resistance at 1.148, while if it falls, support may be found around 1.275 and further down at 1.118. 

Minor economic indicators that are scheduled to be released on Tuesday for the Euro, include: French Trade Balance and Monthly Italian Retail Sales. These are indicators of trade activity and consumer spending in two major EU countries, but are not expected to cause high volatility for the Euro.

EURUSD 1hr chart

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GBP 

The Bank of England announced last Thursday that it would raise its interest rate by 25 basis points. In its previous meeting in December the BOE had already raised its interest rate from 0.1% to 0.25%, bringing the current rate to 0.5%. This is the first time since 2004, that the BOE has announced back-to-back rate hikes, indicating the BOE’s commitment to combating soaring inflation rates. The sterling rose a little after the BOE’s announcements but dipped again on Friday, as the BOE’s decision was widely expected and had been largely priced in.

The uncertain political climate in the UK is putting pressure on the pound, as British PM Boris Johnson is facing opposition even from within his own party and is pressured to resign. Last week a report into the ‘party gate’ scandal was released, containing heavy criticism against the actions of the British PM and finding ‘failures in leadership’. Following the release of the damning report, Boris Johnson’s position became even more strained, and he has been battered in recent meetings of the House of Commons and the British Parliament. Four senior members of the British PM’s staff resigned last week, causing even more turmoil in Downing Street. 

GBP/USD traded sideways on Monday, around the 1.352 level. If the GBP/USD rate goes up again, there may be resistance at the 1.375 level, while if it declines, support may be found at 1.332 and further down at 1.317. 

The UK BRC Retail Sales Monitor is scheduled to be released on Tuesday, which is a relatively minor economic indicator and is not expected to cause high volatility for the currency. 

GBPUSD 1hr chart

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JPY 

The Yen remains at its lowest levels in decades, creating problems for households, as imported goods, especially food and energy, are becoming increasingly expensive for Japanese households.  The BOJ’s dovish monetary policy is creating a gap in interest rates between other major Central Banks, especially the Fed and the BoE, who are raising their benchmark interest rates and are putting pressure on the currency. 

USD/JPY ended the past week higher, at the 115.2 level, but traded lower on Monday, falling as low as 114.9. If the pair gains strength, it may find resistance at 115.6 and at 116, while if it declines, support might be found at 114.8 and further down at 113.48. 

A number of economic indicators are scheduled to be released on Tuesday for the Yen. These include: Average Cash Earnings, Household Spending, Bank Lending and Current account. These are indicators of employment and economic activity in Japan and may cause some volatility in the currency.

USDJPY 1hr chart

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Written by:
Myrsini Giannouli

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