It's Still Tense

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The macro point

For a long time, the foreign exchange market was impervious to the increase in geopolitical risk in Ukraine. The breaking point was reached on Thursday, February 24, when the Russian army attacked Ukraine on three fronts (north from Belarus, south from Crimea, and east from Donbass). In the wake of this, the euro lost almost 200 points against the US dollar (with a low point near 1.1110) and about 210 points against the Japanese yen (with a low point at 127.90). Three reasons explain the strong initial market reaction: 1) for weeks geopolitical experts had claimed that a full invasion of Ukraine was unlikely (the surprise effect explains the sharp drop in the euro); 2) traders quickly worried about the potential economic and financial consequences (rising inflation and possible decline in growth in the eurozone); and 3) many fear that Russia has imperialist and expansionist aims on other countries (Georgia and Moldova in particular), which would make geopolitical risk a lasting disruptive factor for currencies. Once the surprise effect passed, the foreign exchange market regained a semblance of normality in last Friday’s session. But this was short-lived as the market returned to volatility from Asian trading overnight from Sunday to Monday. Traders took in the weekend news: EU arms shipments to Ukraine, bans on Russian civilian and military aircraft from European airspace, partial removal of several Russian banks from the Swift transaction authentication system, and sanctions against the Russian central bank. In retaliation, Russian President Vladimir Putin announced putting the armed forces on maximum alert, including nuclear forces. He is also considering nationalizing foreign assets in Russia belonging to countries supporting Ukraine (a possible example could be Société Générale, which has a subsidiary in Russia). A further escalation of tensions seems inevitable in the short term. It is known that Europeans wish to expand the list of sanctioned Russian individuals. Everything suggests that volatility will remain significant in the hours and days to come, which is why the right hedging strategy must be adopted - our team is at your disposal on this matter. It is too early to understand in detail the economic implications of the situation in Ukraine. However, it seems likely that in the short term this will lead to a sharp rise in energy prices and, as a result, inflation. The barrel of oil crossed the psychological level of $100 last week. All experts agree that this increase is lasting. Last Friday, France’s consumer price index for February jumped to 4.1% annually against an initial estimate of 3.7%. This does not take into account the sharp rise in energy prices in recent days. The consumer price index for March (which won’t be published until next April) may be painful. The notable increase in energy prices will complicate the task of central banks in the weeks and months to come. A few days ago, analysts were expecting a first rate hike by the US Federal Reserve of 50 basis points in March. This is no longer certain. The same goes for the European Central Bank. The latter might decide to delay the normalization phase of its monetary policy a bit to assess the economic impact of the situation in Ukraine. We have entered a period of uncertainty due to geopolitical risk. In the foreign exchange market, technical analysis indicates that the trend remains bearish for EUR/USD. We would not be surprised, given the persistent risk aversion, to see the pair reach 1.1040 in the days ahead. It would require breaking through the 1.16 zone for the pair to return to an upward trend. This is obviously a distant goal. The trend is also bearish for EUR/JPY. In Asian trading last night, the pair was moving around the 128.00 level. If the decline continues, the next target is at 126.67, which acts as support. It is known that the Japanese yen perfectly plays its role as a safe haven in periods of major political disruptions. The supports and resistances shown below indicate respectively the low and high points within which prices should move during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	1.0930	1.1040	1.1529	1.1600
EUR/GBP	0.8165	0.8266	0.8427	0.8467
EUR/CHF	1.0180	1.0202	1.0578	1.0776
EUR/CAD	1.3954	1.4168	1.4590	1.4800
EUR/JPY	123.47	126.67	131.24	132.54

It’s clear that geopolitical risk will still be an important factor to consider in trading over the next sessions. The theme of inflation will also take center stage with the publication of the first estimate of the consumer price index in the eurozone for February. Analysts' consensus anticipates a drop to 4.4% year-on-year compared to 5.0% last January. But, given the French figure we mentioned above, a negative surprise is not excluded. Inflation could accelerate further. This could cause some turmoil in euro pairs in the wake of the publication. American employment is always an important indicator. Unless the final figure is very far from the consensus (400,000 job creations expected in February), it should not have much effect on exchange rates for USD pairs. The keyword this week: caution. Below are the publications and events that should have a major impact on the development of currency rates.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
01/03	16:00	ISM Manufacturing Index (February)	Increase to 58.0 from 57.6 previously.
02/03	11:00	Consumer Price Index (February)	This is an important indicator that will condition the ECB’s action. The consensus forecasts a drop to 4.4% year-on-year against 5.0% in January.
	14:15	Non-Farm Payrolls – ADP (February)	Strong rebound expected by analysts’ consensus to 328,000 from -301,000 in January (this latter figure is subject to revision).
03/03	16:00	ISM Non-Manufacturing Index (February)	Expected progression to 61.0 from 59.9 previously.
04/03	14:30	Labor Department Employment Report (February)	Unemployment rate should decline again to 3.9% (versus 4.0% in January) and job creations are expected to be relatively stable at 400,000.