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Weekly Market Outlook For February 28th to March 4th

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Written by:
Myrsini Giannouli

28 February 2022
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Impact of Russia – Ukraine crisis on currencies, commodities

Western allies announced that they would be blocking "a certain number of Russian banks" from access to the SWIFT banking system and impose restrictions on Russia’s Central Bank, which would effectively cut off Russian banks from the international financing system and undermine the Russian Central Bank’s ability to support the collapsing Rubble.

The Russian President, Vladimir Putin, signed a decree on Monday recognizing the independence of the two separatist regions Donetsk and Luhansk in eastern Ukraine. Immediately afterward he ordered Russian troops into these regions, in a ‘peacekeeping’ mission as he declared, violating Ukraine’s sovereignty. 

On Thursday, Russian forces launched a full-scale invasion of Ukraine, with Russian missiles raining down on Ukrainian cities, and explosions were heard even in Kyiv. The attack was wide-ranged, taking place by land, air, and sea, and was reported as the biggest attack by one state against another in Europe since World War II. 

In a provocative and threatening move on Sunday, Russian President Vladimir Putin ordered his country's deterrence forces, which include nuclear weapons, onto their highest state of alert, following universal condemnation and increased sanctions on Moscow.

Chief of NATO Jens Stoltenberg, stated that Russia’s “brutal act of war” shattered peace in Europe, and NATO has positioned additional US troops in the Baltic nations bordering Russia. Leaders across the world have condemned Russia’s actions and are imposing severe sanctions against Russia. Australia, Canada, and Japan have announced sanctions against Russia, targeting Russian banks and oligarchs. Britain has moved to sanction Russian individuals and banking institutions in the UK and the UK PM Boris Johnson stated that the UK will introduce sanctions against Russia's President Vladimir Putin and Foreign Minister Sergey Lavrov. 

The US President, Joe Biden, announced on Tuesday the "first tranche" of measures against Russia, which aim to deliver a hard blow on the country’s economy, including sanctions on Russia's sovereign debt so that the country can no longer raise money for its state financing. 

The EU has announced further sanctions, targeting Russia’s defense minister and military chiefs and imposing visa bans, and freezing the assets of high-ranking Russian officials. Germany has suspended the approval of the Nord Stream 2 pipeline, a move that may cause an energy crisis in Europe, which depends on Russia for approximately 40% of its gas, and send the prices of energy-related assets even higher. European Commission chief Ursula von der Leyen announced on Sunday that the EU would tighten sanctions on Russia, target Russian ally Belarus with measures and finance the purchase and delivery of weapons to Ukraine, marking the first time in its history that the EU would provide arms in a war. 

On Saturday, the US, the EU, and their allies announced that they would be blocking "a certain number of Russian banks" from access to the SWIFT banking system and imposing restrictions on Russia’s Central Bank. These are nuclear economic measures, that will effectively cut off Russian banks from the international financing system and undermine the Russian Central Bank’s ability to support the collapsing Rubble. This move, however, is expected to cause fallout in western economies and especially in countries with financial interests in Russia, which was the main reason that Germany held off as long as possible from agreeing to this measure.

Russia has threatened to retaliate against EU sanctions, and it is likely that the EU, which relies on Russia for key imports, will pay a heavy price. The price of oil and other key commodities such as corn and wheat is already climbing and prices are expected to climb further as the crisis unfolds, contributing to rising inflation rates in the Eurozone. 

The ECB, the Fed, and other major Central Banks are already trying to strike a balance between soaring inflation rates and economic woes since the onset of the pandemic, and the war in Ukraine is going to complicate matters further. Sanctions against Russia will likely drive the price of key commodities up, especially energy-related commodities, further increasing inflation.

Safe-haven currencies, such as the dollar and the Yen, have climbed during the past few days, as a risk-aversion sentiment prevails and investors turn towards safer assets. The Russian stock market and the Rubble have plummeted to historic lows in the wake of the invasion of Ukraine. Global stock markets crashed to multi-month lows early on Thursday, but recovered later in the week, as markets absorbed news of the escalation of the crisis in Ukraine.

Forex

Important calendar events

  • March 1, USD: ISM Manufacturing PMI
  • March 2, Oil: OPEC-JMMC Meetings, US crude oil inventories
  • March 2, EUR: Annual CPI Flash Estimate, Core Annual CPI Flash Estimate
  • March 2, USD: ADP Non-Farm Employment Change, Fed Chair Powel speech
  • March 3, USD: Fed Chair Powel speech, ISM Services PMI
  • March 4, USD: Unemployment Rate, Non-Farm Employment Change, Monthly Average Hourly Earnings

USD

Rising inflation rates in the US support the dollar, amidst expectations that the Federal Reserve might tighten its monetary policy to tackle inflation, with many investors predicting a sharp benchmark interest raise of 50 base points in March.

The dollar index climbed to 97.6 on Thursday, boosted by the escalation of the crisis between Russia and Ukraine. The dollar is considered a safe-haven currency and rises when a risk-aversion sentiment prevails, as investors turn towards safer assets. The USD retreated on Friday, closing near 96.5, as markets priced in the latest geopolitical developments. 

Last week, Core PCE data released on Friday, rose 5.2% from last year, showing that prices rose at their fastest rate in 39 years, while monthly Core PCE rose by 0.5%. This is a key inflation indicator and may influence the Fed’s monetary policy. Rising inflation rates in the US support the dollar, amidst expectations that the Federal Reserve might tighten its monetary policy to tackle inflation. A series of Fed 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.

Important US indicators released on Thursday, such as Quarterly Preliminary GDP and Unemployment Claims were mostly in line with expectations. US Flash Manufacturing PMI, Flash Services PMI, and CB Consumer Confidence data were released on Tuesday and were mostly positive for the US economy, providing support for the dollar, as signs of economic recovery may steer the Fed’s monetary policy towards a more hawkish direction. 

This week, the USD price is expected to receive a further boost from the war in Ukraine, but FOMC announcements are also expected to affect the dollar, as the next meeting of the US Central Bank on March 16th is drawing near. Fed Chair Powel is due to testify on the Semi-Annual Monetary Policy Report before the House Financial Services Committee, in Washington DC on March 3rd and March 4th. His speeches and the ensuing question and answer sessions are expected to cause some volatility for the dollar and may provide insight into the Fed’s monetary policy.

Several indicators are scheduled to be released this week for the dollar, such as ADP Non-Farm Employment Change, Unemployment Rate, Non-Farm Employment Change, and Monthly Average Hourly Earnings. These are key financial and employment indicators and their release may cause some volatility for the dollar, as they may influence the Fed’s decision to raise its benchmark interest rate.

TRADE USD PAIRS

EUR 

Prices of key commodities in the Eurozone, and especially of energy-related commodities are soaring and may finally force the ECB to rethink its dovish policy amid soaring inflation.

The Euro retreated against the dollar last week, as a risk-aversion sentiment prevailed following Russia’s invasion of Ukraine. The Euro fell sharply against the dollar early on Thursday, reaching as low as 1.110, breaking through the 1.127 level support but climbing again on Friday, closing near the 1.127 level, as the effect of the invasion in Ukraine started to wear off. If the currency pair goes up, it may encounter resistance at 1.148 and further up at 1.169, while if it declines, further support may be found at the 1.112 level. 

Economic data released last week for France and Germany, which are among the Eurozone’s leading economies were overall positive. Indications of economic recovery in the Eurozone increase the chances that the ECB will pivot toward a more hawkish policy to tackle rising inflation rates and benefit the Euro.

Annual Final CPI and Core CPI data released last week showed that inflation rates in the Eurozone remain at high levels. Annual EU inflation rates reached 5.1% in January, more than double 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 war in Ukraine has triggered a risk-aversion sentiment putting pressure on the Euro. However, prices of key commodities in the Eurozone, and especially energy-related commodities, are soaring and may finally force the ECB to rethink its dovish policy amid soaring inflation.

On March 2nd, Annual CPI Flash Estimate and Core Annual CPI Flash Estimate data are scheduled to be released for the Eurozone. These are key inflation indicators, which may influence the ECB’s policy and their release might cause some volatility for the Euro. 

EURUSD 1hr chart

TRADE EUR PAIRS

GBP 

BOE Governor Andrew Bailey stated that the BOE estimates inflation rates to reach a 30-year high of 7.25% by April and emphasized the importance of tackling rising inflation rates in the UK, increasing the probability of another BOE rate hike in March.

The sterling fell sharply against the dollar on Thursday, as news of the Russian invasion of Ukraine buoyed the safe-haven dollar and pushed other currencies down. GBP/USD plummeted to 1.327, pushing through the 1.332 level support, but recovered a little later, closing around 1.34 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.  

BOE Governor Bailey testified last week before the Parliament's Treasury Committee at the Monetary Policy Report Hearings on inflation and the economic outlook. Bailey’s speech was hawkish overall, emphasizing the importance of tackling rising inflation rates in the UK and providing support for the sterling. He stated that the BOE estimates inflation rates to reach a 30-year high of 7.25% by April, increasing the probability of another BOE rate hike at 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 toward pre-pandemic interest rates.  

Financial indicators released last week were mostly positive for the British economy, showing signs of expansion and recovery from the effects of the Omicron Covid-19 wave in the UK, providing further support for the sterling. The British PM Boris Johnson has lifted all Covid restrictions in his “living with Covid” plan and the British economy is expected to grow swiftly and may be able to withstand a tightening of the BOE’s monetary policy. 

The political climate in the UK has not improved significantly and is putting pressure on the pound, although the public’s attention has turned towards the war in Ukraine. British PM Boris Johnson seems to be weathering the storm although his position is still precarious and he is focusing his diplomatic efforts on the Ukraine invasion. 

The British PM received a police questionnaire about his actions regarding the ‘party gate’ incidents last week, which he had to complete ‘under caution’, making him the first British PM to be subjected to this level of questioning. This week, the results of the Metropolitan Police investigation into the scandal are due, and a damning report might yet signal the end of Johnson’s premiership.

GBPUSD 1hr chart

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JPY 

The Yen gained strength over the past week, as risk appetite diminished over the war in Ukraine, but has not picked up pace as much as other safe-haven assets, as the BOJ’s fiscal policy is keeping the Yen down.

The Yen has been 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. The Yen gained strength over the past week, as risk-appetite diminished over the war in Ukraine and investors turned towards safer assets. The currency, however, has not picked up pace as much as other safe-haven assets, as the BOJ’s fiscal policy is keeping the Yen down.

Annual inflation rates in Japan are far below the BOJ’s 2% goal and the BOJ reiterated last week that it would continue to buy 10-year JGBs to achieve its inflation 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 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 lost ground against the dollar on Thursday, as both are considered safe-haven currencies, but the dollar received a bigger boost from the escalation of the crisis in Ukraine. The USD/JPY rate was catapulted to the 115.7 level and continued trading at high levels for the remainder of the week, closing near 115.5 on Friday. If the USD/JPY pair climbs further, it may find resistance at the 116.3 level, while if it declines, support might be found at 114.8 and further down at 113.4.

USDJPY 1hr chart

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Gold

The price of oil and other key commodities is climbing, contributing to rising inflation rates and benefiting the price of gold since it is often used as an inflation hedge. 

The gold price skyrocketed to $1,974 on Thursday, its highest price since September 2020, after Russia launched an attack on Ukraine. The gold price jumped early on Thursday, breaking through the $1,917 per ounce resistance level, but deflated later in the week, closing around $1,989 per ounce on Friday after markets absorbed the news of the invasion in Ukraine. If the price of gold decreases, support may be found at 1,782 per ounce.  

The price of gold has been exhibiting high volatility the past few days, spurred by the Ukrainian crisis rollercoaster. Mounting geopolitical tensions support the price of gold, as risk appetite diminishes and demand for safer assets grows. 

Treasury yields fell early on Thursday but climbed again later in the week. Rising yields put pressure on the price of gold and compete directly with gold as an investment, as gold does not pay dividends or interest. 

Sanctions against Russia are likely to have a heavy impact not only on the Russian economy but on the global economy as well and especially on the Eurozone, which relies on Russia for key imports. The price of oil and other key commodities such as corn and wheat is already climbing and prices are expected to climb further as the crisis unfolds, contributing to rising inflation rates in the Eurozone. The price of gold benefits from rising inflation, since it is often used as an inflation hedge. 

The effect of rising inflation on gold may be temporary though, soaring inflation rates may push major Central Banks towards a more hawkish policy. The Fed, the ECB, and the BOE are expected to tighten their monetary policies in the following weeks to months, boosting the value of real yields and putting pressure on the price of gold.

XAUUSD 1hr chart

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Oil

Markets came to terms with the latest developments in the Ukraine crisis on Friday and oil prices retreated, as western sanctions avoided targeting the sensitive energy sector as much as possible.

Fears that the war breaking out between Russia and Ukraine would disrupt global oil and natural gas supplies have driven the price of oil up, past the $100 per barrel key level. Russia is the world’s second-largest oil exporter after Saudi Arabia, shipping around 5 million barrels of crude oil per day, approximately half of which goes to the Eurozone. A disruption in the distribution of oil from Russia would create an energy crisis, pushing oil prices to even higher levels.

Brent crude hit a high of over $105 per barrel on Thursday for the first time since 2014, while WTI climbed to almost $102 per barrel. WTI retreated somewhat on Friday, closing around $93 per barrel. Markets came to terms with the latest developments in the Ukraine crisis on Friday and oil prices retreated, as western sanctions avoided targeting the sensitive energy sector as much as possible. WTI is trading in an uptrend, but in case the uptrend is reversed, support may be found near $88.5 per barrel and further down around $82.4 per barrel.

Sanctions against Russia are expected to push the price of oil even higher, even though the US and the EU have so far avoided imposing direct sanctions on Russia’s gas and oil exports. Germany however, has suspended the approval of the Nord Stream 2 pipeline, a move which may cause an energy crisis in Europe, which depends on Russia for approximately 40% of its gas, and send the prices of energy-related assets even higher.

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. Crude oil inventories released on Thursday rose for the second week in a row, adding another 4.5 million barrels this week, but failed to check the oil price rally. It has been reported that Iran could add 900,000 barrels a day if a deal with the US is struck over its nuclear program, which might help to alleviate the energy crisis somewhat. 

For this coming week, March 2nd is an especially crucial day for the price of oil and heavy volatility is expected in oil prices throughout the day. The next OPEC+ meeting is scheduled for Wednesday, March 2nd, and the situation in Ukraine is going to be discussed in the meeting, as well as skyrocketing oil prices. The organization is expected to maintain its goal of increasing oil output by 400,000 barrels per day, despite the war in Ukraine. Global oil prices have increased by more than 11% since OPEC’s last meeting in February, and the main subject of the meeting is expected to be to avoid a disruption in the distribution of oil, which would push prices even higher. US Crude Oil Inventories are also scheduled to be released on Wednesday and may also affect the price of oil.

WTI 1hr chart

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Bitcoin and major cryptocurrencies

Mounting geopolitical tensions have been driving the price of cryptos down, as investors shy away from risk assets.

Cryptos have been under pressure since the beginning of the year, hit by a bout of risk-aversion. Mounting geopolitical tensions have been driving the price of cryptos down, as investors shy away from risk assets. 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.

Bitcoin and other major cryptocurrencies plummeted on Thursday but then recovered, moving once again almost in tandem with stock markets. Bitcoin plunged to 34,000 early on Thursday, then spiked to 39,000 as Ukraine's invasion created volatility in markets and cryptocurrencies alike. During the weekend, it dropped to the $37,500 level. If Bitcoin price declines, it may find support at $36,000 and $33,000, while resistance may be found at $40,000.  

Ethereum price plummeted to the $2,300 level, testing its support at that level, but then climbed to $2,700 as crypto markets started to recover from the effects of the Russian invasion in Ukraine. During the weekend, the ETH price dipped again, trading below the $2,640 support. In case of ETH price decreases, support may be found at around $2,300 again. In case its price goes up, it may find resistance at $3,000 and further up at $3,400.

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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