War and Peace

The macro point

European stocks rose last week in anticipation of a possible peace deal or ceasefire in Ukraine. The effect was also felt in the foreign exchange market, particularly on euro pairs. Investors believe that an agreement could boost European growth, which remains sluggish (Bloomberg consensus as of February 19 at 1.1% this year). According to a Goldman Sachs study, it could increase the Union's real GDP by 0.1% to 0.5%. Everything obviously depends on the parameters of the agreement and its implementation. There are still many points of uncertainty. For example: who will be responsible on the ground to ensure that Russian troops respect the commitments made by the Kremlin? Will NATO be involved? What will be the financial and territorial concessions on both sides? Who will finance the reconstruction of Ukraine? etc. The timeline is also uncertain. But one can venture to consider that an agreement, even partial, could be signed during the year. However, we remain cautious and do not share the prevailing optimism. It should not be that this agreement is a new Munich – referring to the Munich Agreements signed by France, the United Kingdom, Italy, and Germany, which led to the disappearance of the independent state of Czechoslovakia. For the record, Czechoslovakia had not been invited to the negotiations, similar to Ukraine today...

In any case, one currency has clearly benefited from the agreement rumors, and that is the Russian ruble. Since the beginning of the year, the Russian currency has rebounded by 20% against the US dollar – erasing the losses linked to the mini-crash at the end of 2024. It should be noted that the ruble is a currency that is partially administered by the central bank (similar to the Chinese yuan). The dynamics are different for the Ukrainian currency, the hryvnia. The exchange rate against the dollar and the euro is set on a weekly basis by the central bank. At the start of the war, the fixed exchange rate was temporarily abandoned because the central bank was no longer able to intervene in the foreign exchange market due to the dramatic drop in its foreign currency reserves. Fortunately, since then, European countries have provided a lot of funds to the central bank, which has allowed the hryvnia to recover. From a monetary perspective, the worst is certainly over for Ukraine.

The United Kingdom was also in the spotlight last week due to very strong employment market statistics, which are not favorable for the Bank of England (BoE). In the three months leading up to December 2024, the unemployment rate remained stable at 4.4% – which is low. It's below the consensus (4.5%). More importantly for the central bank: the annual wage inflation (which includes premiums and bonuses) increased from 5.6% to 6%. That's much more than expected. This data partly explains the resilience of the pound sterling, especially against the euro. With such wage dynamics, it's going to be difficult for the BoE to sharply lower key rates in the short term. The rate differential clearly favors the pound sterling over the euro.

Technical point

In the currency market, the euro remains supported by flows of purchases of European stocks, which are significantly undervalued compared to American stocks, by around 33%. For now, it is a short-term movement that began at the start of January. It is still too early to know if it is structural. But it partly explains the resilience of the single currency.

On its side, the yen has been supported by the possibility of a further rate hike by the Bank of Japan. Traders anticipate a 25 basis point hike at the July meeting, which would bring the benchmark rate to 0.75%. Of course, it's a very distant horizon, and many things can happen by July. But these anticipations could support, at least in the short term, the yen against the euro and the dollar.

Announcements to follow

Potential new comments on a peace process in Ukraine, as well as new tariff measures by the Trump administration, could still fuel currency volatility this week. It remains high, as we mentioned last week. As for statistics, there should be no big surprises. Consumer prices in the eurozone are expected to come in at 2.5% year-on-year – confirming the leeway to lower key rates in the eurozone to 2%, or even 1.85%. In the United States, Q4 GDP is due on Thursday. It's not a statistic that is usually closely watched by traders. In any case, expect a good figure – proving once again the incredible resilience of the American economy.

The information presented in this publication is communicated to you purely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should in no way serve as a basis or be considered as an incentive to engage in any investment.