Uncertainty will continue to affect markets this week, but an all-out war looks unlikely. Washington and Moscow are engaged in an infowar to set the narrative whilst European leaders remain positive with de-escalation talks. Ukraine’s foreign minister downplayed border tensions with Russia, saying there’s been no “pivotal change” in the outlook. On Tuesday, German Chancellor Olaf Scholz meets with Putin and has not given up hope that diplomacy can avert a war.
Elsewhere the Iran nuclear talks in Vienna continue with suggestions that progress will revive the landmark agreement from 2015. Unlocking the Iranian Oil supply will affect oil prices and the current energy crisis, but an outcome this week is unlikely.
USD
Outside of more significant world events, markets will be focusing on the continued rhetoric from FED members in anticipation of a March interest rate hike. Calls will be forecasting a likely 25bps or 50bps hike, but a 100bps hike is in play after CPI inflation data hit a four-decade high.
A delicate balance is needed to rein in inflation whilst supporting the economy’s recovery from the pandemic. If inflation recedes with fewer hikes, then the scenario may be bullish for USD and US equities by years end. By contrast, if multiple hikes are needed to cool inflation, the US could enter a recession.
FED members will speak on Monday, Thursday and Friday this week.
EUR
The hawkish tones that sent the EUR rallying are now being dialled back with fears of killing off the recovery. ECB Chief Economist Philip Lane reiterated that Eurozone inflation is likely to recede toward the bank’s two per cent target this year without any increase in the ECB’s interest rates.
Friday’s EUR decline was also fueled by the added danger of a Russian invasion on the east of Europe. As the world awaits the outcomes of continued talks between Western allies and Russia, the EUR will have more to lose than USD or GBP with the prospect of war on the continent.
ECB’s President Lagarde will give a speech on Monday, potentially moving the needle.
GBP
After recent losses, the Pound will try to cement its recovery this week against a weaker Euro. As with its major rivals, the developments around Ukraine will add risk to any potential gains whilst Unemployment, Inflation, and Retails sales data will potentially impact price this week.
THIS WEEK
Monday
EUR ECB’s President Lagarde speech
Tuesday
GBP Unemployment Rate (3M)(Dec)
EUR Gross Domestic Product s.a. (QoQ)(Q4) PREL
Wednesday
GBP Consumer Price Index (YoY)(Jan)
USD Retail Sales (MoM)(Jan)
USD FOMC Minutes
Friday
GBP Retail Sales (YoY)(Jan)