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Ukraine developments dominate exchange rates

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Written by:
Myrsini Giannouli

23 February 2022
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Ukrainian crisis update

Last week, European leaders held an emergency meeting to discuss the EU’s response to the situation in Ukraine. On Friday, US President Joe Biden issued a final warning to the Kremlin of extraordinary and crippling economic sanctions against Russia in the event of an attack against Ukraine. Ceasefire violations and shelling have been reported during the past few days near the eastern Ukrainian borders, with each side accusing the other of the incidents. 

Mounting tensions between Russia and Ukraine at the end of last week turned investors’ attention towards safe heaven currencies, boosting the dollar and the Yen, while the Euro retreated.

On Monday morning, hopes of a peaceful resolution to the crisis in Ukraine were revived. The White House announced that US President Joe Biden has agreed ‘in principle’ to a meeting with his Russian counterpart Vladimir Putin, as long as Russia did not invade Ukraine. The Russian side appeared to be more hesitant about a summit between the two leaders, with Kremlin spokesperson Dmitry Peskov stating that there were "no concrete plans" for a meeting between the two presidents.

Hopes for a diplomatic resolution to the issue were diminished later on Monday, as Vladimir Putin signed a decree recognizing the independence of the two separatist regions Donetsk and Luhansk in eastern Ukraine. Immediately afterward, he ordered Russian troops in these regions, in a ‘peacekeeping’ mission as he stated, effectively invading Ukraine. 

The EU and the US have condemned the Russian President’s actions and are prepared to enforce economic sanctions on Russia. The EU foreign policy chief Josep Borrell stated that EU members states have unanimously agreed upon a package of new sanctions against Russia. Britain has already moved to sanction Russian individuals and banking institutions in the UK, while it is reported that further sanctions are on the table. 

Safe-haven currencies, such as the dollar and the Yen, are expected to benefit from these recent developments as demand for safer assets grows. However, Russia’s move against Ukraine has been anticipated for some time now and may have largely been priced in by markets. Further developments are expected and may cause high market volatility in the coming weeks.

Important Calendar Events

  • JPY: Bank Holiday
  • GBP: Monetary Policy Report Hearings, BOE Gov Bailey Speech
  • EUR: Annual Final CPI and Core CPI 


US Flash Manufacturing PMI, Flash Services PMI, and CB Consumer Confidence data were released on Tuesday and were mostly positive for the US economy. These are leading indicators of economic health and provide support for the dollar, as signs of economic recovery may steer the Fed’s monetary policy towards a more hawkish direction. 

Rising inflation rates in the US support the dollar, amidst expectations that the Federal Reserve might tighten its monetary policy to tackle inflation. Monthly Retail and Core Retail Sales released last week were higher than expected, indicating that the US economy is moving in a positive direction, also fuelling expectations of a sharp increase in the Fed’s interest rates.

The Federal Reserve has so far indicated that it will tighten its monetary policy to fight soaring inflation rates in the US. It is not clear, however, to what extent the US Central Bank intends to increase its interest rates, and there is wide speculation on the subject, causing uncertainty and market volatility. A series of rate hikes have already been priced in by the markets, with many investors predicting a sharp benchmark interest raise of 50 base points in March.

The dollar index moved higher than the 96 levels on Tuesday, supported by economic data and rising geopolitical tensions. The dollar is considered a safe-haven currency and rises when a risk-aversion sentiment prevails, as investors turn towards safer assets. 

Several economic and inflation indicators for the dollar will be released throughout the week and especially on February 24th and 25th and may cause volatility for the dollar, since economic, inflation, and employment data may influence the Fed’s future monetary policy. Especially important inflation indicators are the Core PCE data, which is scheduled to be released on February 25th. The next meeting of the US Central Bank in March is drawing near and indicators of inflation are expected to affect the Fed’s decision to raise its benchmark interest rate.



German IFO Business Climate data released on Tuesday were positive for the German economy, giving the Euro a boost. These are indicators of economic health for Germany, which is the Eurozone’s leading economy, and show that the German economy is recovering, especially following the positive German Flash Manufacturing PMI and German Flash Services PMI data released on Monday. French PMI indicators, which were also released on Monday, showed that the French economy is moving in a positive direction.

Indications of economic recovery in the Eurozone increase the ECB's chances to pivot towards a more hawkish policy to tackle rising inflation rates and benefit the Euro. Annual inflation rates in the Eurozone reached 5.1% in January, more than double than the ECB’s goal of 2.0%, prompting the EU Central Bank to take action. The ECB seems hesitant to shift towards a more hawkish policy though, as a new debt crisis is looming in the EU. 

The Euro rose against the dollar on Tuesday, with the EUR/USD rate climbing up to the 1.136 level. If the currency pair goes up, it may encounter resistance at 1.148 and further up at 1.169, while if it falls, support may be found around 1.275 and further down at 1.118. 

Annual Final CPI and Core CPI are scheduled to be released on Wednesday for the Eurozone and may cause some volatility for the currency, as these are key indicators of inflation and may influence the ECB’s monetary policy.

EURUSD 1hr chart



UK Public Sector Net Borrowing and CBI Industrial Order Expectations released on Tuesday showed that the British economy is reopening, but were lower than expected. UK Flash Manufacturing PMI and Flash Services PMI data released on Monday for the UK were positive for the British economy, showing signs of expansion and recovery from the effects of the Omicron Covid-19 wave in the UK. Retail sales and employment data released last week also showed that the UK economy is moving in a positive direction, paving the way for a shift towards a more hawkish fiscal policy.

The British economy is expected to make a swift recovery in the coming months, as PM Boris Johnson is lifting all Covid restrictions in his “living with Covid” plan. The British economy is expected to grow once the restrictions are lifted, and may be able to withstand a tightening of the BOE’s monetary policy, providing further support for the sterling. 

Soaring inflation rates in the UK increase the probability of another BOE rate hike and many investors expect another back-to-back rate hike on the BOE’s next policy meeting in March. The Bank of England has already performed two back-to-back rate hikes, bringing its interest rate to 0.5% and expectations of more frequent and sharp rate hikes are boosting the pound. Markets have already priced in approximately six BOE rate hikes this year and if these predictions come true, they will signal a swift return towards pre-pandemic interest rates.  

The uncertain political climate in the UK is putting pressure on the pound though, as British PM Boris Johnson’s position is still precarious. This week, the results of the Metropolitan Police investigation into the ‘party gate’ scandal are due, and a damning report might signal the end of Johnson’s premiership. 

The sterling was supported by expectations of a hawkish BOE policy and GBP/USD traded mostly sideways around the 1.358 level on Tuesday. 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.  

Monetary Policy Report Hearings are scheduled for Wednesday and may cause volatility for the sterling. During the hearings, BOE Governor Andrew Bailey and other MPC members are scheduled to testify on inflation and the economic outlook before the Parliament's Treasury Committee. Their speeches will be scrutinized by traders for hints into the BOE’s monetary policy, ahead of the BOE’s next meeting in a few weeks.

GBPUSD 1hr chart


The Yen has been strongly affected by the crisis in Ukraine these past few weeks, exhibiting price volatility every time there are fresh developments. The Yen is considered a safe-haven currency and falls when risk appetite grows. 

Last week, the annual national core CPI released was lower than expected, reaching 0.2%, with national inflation far lower than the BOJ’s 2% target. Low inflation rates in Japan and a weakening economy are steering the BOJ towards maintaining its ultra-accommodating monetary policy. Last week, the BOJ reiterated that it would continue to buy 10-year JGBs to achieve its 2% inflation target. The BOJ’s dovish monetary policy is creating a gap in interest rates with other major Central Banks, especially with the Fed and the BOE. As a result, the Yen becomes less appealing to investors, pushing its value down. 

The Yen retreated against the dollar on Tuesday, with the USD/JPY rate climbing to 115.2. Russia’s move against Ukraine seems to have already been priced in by markets and demand for safe-haven currencies was not as strong as expected. If the USD/JPY pair climbs again, it may find resistance at the 116 level, while if it declines, support might be found at 114.8 and further down at 113.48.

Wednesday is a bank holiday for Japan and no major indicators for the Yen are scheduled to be released for the day.

USDJPY 1hr chart


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Written by:
Myrsini Giannouli

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