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Weekly Market Outlook For February 21st to 27th

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Written by:
Myrsini Giannouli

21 February 2022
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Impact of Russia – Ukraine crisis on currencies, commodities
Geopolitical tensions were re-ignited and investors turned towards safe-haven assets, with gold prices climbing to $1,900 per ounce, while crypto markets were hit hard, with Bitcoin plummeting below the $40,000 key level.

Diplomatic talks and threats of sanctions against Russia seem to have little effect so far and the likelihood of war breaking out is increasing. U.S. Secretary of State Anthony Blinken warned that Russia could launch an attack against Ukraine at any time, even during the winter Olympics, and warned US citizens to leave Ukraine. The US State Department has warned that an attack against Ukraine might take place at any time, while many countries, including the US, the UK, and Israel warned citizens to leave Ukraine and are evacuating personnel from their embassies.

On Tuesday, the Russian defense minister stated that some troops had returned to their base after completing drills near the Ukrainian border. The move raised hopes of de-escalation of the crisis and demand for safe-haven assets and gold fell, while risk-assets such as cryptocurrencies rose. 

NATO however expressed doubts that there was a withdrawal of Russian troops and the situation remains critical. Secretary-general of NATO Jens Stoltenberg stated that there is no evidence of de-escalation and that Russia was building up troop numbers. The Kremlin denied the allegations but US Secretary of State Antony Blinken backed up the claims, reporting that another 7,000 troops have been added to the already sizeable forces of Russian forces near the Ukrainian borders, with the latest tally exceeding 150,000 troops. In addition, the largest cyberattack in the history of Ukraine was launched against two of its banks and its defense ministry, with the Ukrainian side accusing Russia of launching a cyberwar against its institutions.

European leaders held an emergency meeting last week, to discuss the EU’s response to the situation in Ukraine. France’s foreign minister stated in an interview that Europe has its concerns over Russia exercising control on neighboring countries and that the EU needs to update its security framework. 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 the past few days near the eastern Ukrainian borders, with each side accusing the other of the incidents. During the weekend, French President Emmanuel Macron took a leading role in diplomatic negotiations, opening a dialogue with his Russian counterpart, Vladimir Putin and the foreign ministers of the two countries have agreed to meet in the following days. 

As tensions in the region were re-ignited over the past few days, demand for risk-assets fell and investors turned towards safe-haven assets. Gold price climbed to $1,900 per ounce and safe-haven currencies such as the Yen and the dollar were boosted. Crypto markets were hit hard, with Bitcoin plummeting below the $40,000 key level.

Forex 

Important calendar events

  • Feb 21, EUR: German Flash Manufacturing PMI, German Flash Services PMI
  • Feb 23, GBP: Monetary Policy Report Hearings
  • Feb 24, USD: Preliminary Quarterly GDP
  • Feb 25, USD: Core PCE Price Index

USD

It is not clear to what extent the US Central Bank intends to increase its interest rates, causing uncertainty and market volatility, with many investors predicting a benchmark interest raise of 50 base points in March.

The dollar was under pressure early last week, following reports that several Russian troops would withdraw from the Ukrainian border. The dollar is considered a safe-haven currency and rises when a risk-aversion sentiment prevails, as investors turn towards safer assets. The dollar index climbed again though, closing at 96.11 on Friday, as tensions between Russia and Ukraine rose again.

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 release of the FOMC minutes last Wednesday however, did not provide clear indications of an aggressively hawkish policy as some investors expected, and the dollar index dipped as low as 95.68. 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. The FOMC minutes pointed to a hawkish Fed policy, with multiple rate hikes this year, but investor expectations were higher. 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.

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.

TRADE USD PAIRS

EUR 

Traders shy away from the Euro and shift towards safe-haven assets, as tensions between Russia and Ukraine mount again and an escalation of the conflict seems to be imminent.

Monthly EU Industrial Production data released last week, showed that the Eurozone economy is gaining strength, giving the Euro a boost. Indications of economic recovery in the Eurozone increase the ECB's chances to pivot towards a more hawkish policy to tackle rising inflation rates. 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, with Italian and Greek bond yields rising to pre-pandemic heights. 

The Euro gained strength against the dollar at the beginning of last week, supported by the release of the Eurozone financial indicators, as well as by hopes of de-escalation of the Russia – Ukraine crisis. Later in the week, however, the Euro lost ground against the dollar, as geopolitical tensions were re-ignited. Traders shy away from the Euro and shift towards safe-haven assets, as tensions between Russia and Ukraine mount again and an escalation of the conflict seems to be imminent.

The Euro lost ground against the dollar in the past few days, with the EUR/USD rate closing near 1.132 on Friday. 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. 

The German Flash Manufacturing PMI and German Flash Services PMI data are scheduled to be released on February 21st. These are indicators of economic health for Germany, which is the Eurozone’s leading economy. The release of these indicators might cause some volatility in the currency, as traders will assess this data to gain insight into the ECB’s plans.

EURUSD 1hr chart

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GBP 

Retail sales and employment data released last week showed that the UK economy is moving in a positive direction, paving the way for a shift towards a more hawkish fiscal policy to tame inflation.

UK inflation data released last week showed that inflation rates in the UK have reached a 30-year peak, supporting expectations of a more hawkish BOE policy. Annual CPI and Core CPI data released last Wednesday were higher than expected, with headline inflation rising by 5.5% within the past year, up from 5.4% last month. Retail sales and employment data released last week showed that the UK economy is moving in a positive direction, paving the way for a shift towards a more hawkish fiscal policy to tame inflation. 

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. There is wide speculation that the BOE will follow an aggressively hawkish policy to tackle rising inflation rates in the UK. 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. His ratings continue to fall and a recent poll has shown that half of Britons think he has performed poorly as a PM. His recent plan to end all COVID-19 measures in the UK abruptly may have disastrous effects and put over 500,000 people at risk. 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 British PM has responded to a police questionnaire regarding his actions on the incidents in question and is waiting for the outcome of the investigation.

The sterling was supported by expectations of a hawkish BOE policy last week and GBP/USD climbed up to 1.364, but retreated slightly and closed at 1.358 on Friday. 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 Monetary Policy Report Hearings will take place on February 23rd and might influence the sterling. The BOE governor Andrew Bailey and other BOE MPC members are due to testify before the Parliament's Treasury Committee during these hearings. The event is expected to cause volatility for the currency, as the BOE is pondering its next move in the fight against inflation. 

GBPUSD 1hr chart

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JPY 

Japan's annual national core CPI ached 0.2%, with low inflation rates and a weakening economy steering the BOJ towards maintaining its ultra-accommodating monetary policy.

The Yen declined earlier this week, as reports of Russian troops withdrawing from the Ukrainian borders raised hopes of de-escalation of the crisis between the two countries. The Yen is considered a safe-haven currency and falls when risk appetite grows. As, however, the withdrawal of the Russian troops has been disputed by NATO and US officials, investors have been turning to safe-haven assets once more and the Yen gained strength at the end of last week. 

The annual national core CPI released on Friday 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. 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 rose against the dollar at the end of last week, with the USD/JPY rate testing its 114.8 level support, before closing near the 115 level on Friday. If the USD/JPY pair climbs again, it may find resistance at the 116 level, while if it declines, support might be found at 113.48.

USDJPY 1hr chart

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Gold

The gold price peaked above $1,900 per ounce last Thursday, its highest level since June 2021, as tensions in Ukraine were re-ignited and demand for safe-haven assets grew.

Safe-haven assets, such as gold, were boosted over the past weeks, over fears of a Russian attack against Ukraine. The price of gold plummeted last Tuesday though, following an announcement by the Russian defense minister that several troops would withdraw from the Ukrainian border and tensions eased somewhat as the Russian side seemed willing to open a dialogue. Risk appetite grew following this announcement, pushing the price of gold down. Russia’s claims were refuted by NATO and the US, though, fears that the Ukrainian crisis might escalate even within the coming week.  

Mounting geopolitical tensions also send inflation rates up, as the value of certain commodities, and especially of energy-related assets increases. The price of gold benefits from rising inflation, since the metal is often used as an inflation hedge.

The gold price peaked above $1,900 per ounce last Thursday, its highest level since June 2021, as tensions in Ukraine were re-ignited and demand for safe-haven assets grew. Gold price traded sideways on Friday, closing near $1,898 per ounce. If the price of gold continues to rise, it may find resistance near its June 2021 high at $1,917 per ounce, while if it decreases, support may be found at 1,782 per ounce.  

In the week ahead, the Russia- Ukraine crisis is expected to strongly influence the gold price. Economic and inflation indicators scheduled to be released in the US, and especially the US PCE inflation indicators, may also affect the price of gold, as the Fed’s much-anticipated meeting in March is drawing near.

XAUUSD 1hr chart

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Oil

The reported progress on the Iran nuclear deal has put pressure on the price of oil, counterbalancing the effects of the crisis in Ukraine.

Oil prices jumped to an eight-year high last week, amid growing fears of a Russian invasion against Ukraine. Oil price benefitted from mounting geopolitical tensions and WTI rose almost to $96 per barrel on Monday. On Tuesday, however, Russia stated that it would remove some of its troops from the Ukrainian border, in a move that was seen as an attempt to defuse the crisis. Oil prices dropped rapidly after the announcement, reaching $90.7 per barrel. NATO officials however have expressed doubts that there was the withdrawal of Russian troops and the situation remains critical. 

The price of oil has been increasing over the past months, as existing international inventories are tight and supply is trying to catch up with rising demand. US crude oil inventories released last Wednesday however, increased unexpectedly by 1.1 million barrels, putting pressure on the price of oil. In addition, there are reports that Iran could add 900,000 barrels a day in the future if a deal with the US is struck over its nuclear program. The Biden administration is eager to close the deal and bring the price of oil down, while the foreign minister of Iran has stated that an agreement could be reached as early as March. The reported progress on the Iran nuclear deal has put pressure on the price of oil, counterbalancing the effects of the crisis in Ukraine.

Oil prices remained high last week, supported by mounting tensions between Russia and Ukraine. Reports of the nuclear deal with Iran though checked its ascend and WTI price closed at $92.4 on Friday. WTI is still trading in an uptrend, but in case the uptrend is reversed, support may be found at the $82.4 per barrel level and further down around $78.8 per barrel and $77.8 per barrel.

WTI 1hr chart

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Bitcoin and major cryptocurrencies

As the crisis in Ukraine might escalate at any time, risk appetite decreases, and investors turn towards safe-haven assets, putting pressure on crypto markets.

Cryptocurrency prices surged earlier last week, amidst reports of Russia – Ukraine tensions easing. On Wednesday, though, the US and NATO cast doubts on Russia’s claims of withdrawing troops and tensions rose again, putting pressure on cryptocurrencies. As the crisis in Ukraine might escalate at any time, risk appetite decreases, and investors turn towards safe-haven assets, putting pressure on crypto markets.

The global crackdown on cryptocurrencies was also renewed last week, as the Financial Stability Board, which makes recommendations to the G20 nations on financial rules, advised policymakers to take swift action in drafting legislation covering the digital asset market as there is increasing affinity of crypto markets with traditional markets.

Bitcoin plummeted during the weekend, dropping below the key $40,000 level, and is currently trading around the $38,000 level. If its price declines, it may find support at $36,000 and $33,000. Ethereum crashed, dropping to the $2,600 level, and is currently testing its support at $2,640. If the price of ETH continues to decline, it might find further support at around $2,300. In case its price goes up, it may find resistance at $3,000 and further up at $3,400. 

Cryptos have been under pressure since the beginning of the year, hit by a bout of risk-aversion. The bulls have attempted several times to reverse the downtrend, with little success so far. The recent volatility in stock markets, and especially the fall of tech stocks has been affecting crypto markets, which seem to have developed a strong dependency on stock market trends. 

BTC/USD 1h Chart

BTCUSD 1hr chart

 

ETH/USD 1h Chart

ETHUSD 1hr chart

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Written by:
Myrsini Giannouli

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