Weekly market update 25 February – Dollar and oil prices extended their rally on the back of the Russian-Ukrainian crisis, Euro and Pound suffered against the greenback

Weekly market update 25th February – Dollar and oil prices extended their rally on the back of the Russian-Ukrainian crisis, Euro and Pound suffered against the greenback

1. The Dollar took a breather from its rally to reach 96.6 towards the end of the week following the latest developments in the Russian-Ukrainian crisis. The G7 nations agreed to exclude major Russian banks from the SWIFT messaging system and to target the Russian Central Bank’s international reserves. As the situation continues to evolve, uncertainties around the world could provide more support for the safe-haven dollar. The core PCE price index showed a 5.2% rise, which was above market expectations of 5.1%, and the biggest increase since April 1983. However, geopolitical risks stemming from the crisis in Eastern Europe could potentially prevent the Fed from hiking rates by 50bps at the upcoming March meeting despite strong inflationary pressures. Going into March, investors will be watching the upcoming non-farm payrolls data closely for a gauge on the labour market in the U.S., as well as the developments between Russia and Ukraine.

2. The Euro and Pound both underperformed against the stronger greenback over the week. Both currencies were badly hit by the geopolitical risks that continue to evolve between Russia and Ukraine. Meanwhile, traders are still watching statements from the ECB for more clues on its monetary policy, given the geopolitical risks and price pressures that exist within the European bloc. ECB President Christine Lagarde recently mentioned that the central bank is ready to do whatever is necessary to maintain price stability and financial stability. Similarly, investors are also watching out for hints on how the Bank of England may alter their plans to hike rates in the near future, with many expecting a softer tightening of monetary policy given the current developments in Eastern Europe. Both currencies are still expected to see some downside in the near term as geopolitical tensions between Russia and Ukraine escalate. In the coming week, investors will be watching out for CPI and core CPI data to be released as a gauge of inflationary pressures in the European bloc.

3. Commodity currencies such as the Aussie, Kiwi and Loonie generally outperformed the U.S. dollar over the week. The Aussie benefitted from a boost in commodity prices given the country’s status as a net energy exporter. Similarly, the Loonie benefited from oil prices breaching $100 per barrel since Canada is a major exporter of oil. The Kiwi, on the other hand, appreciated after the Reserve Bank of New Zealand announced a 25 basis point hike in the official cash rate over the week, and also mentioned that further rate hikes are possible to cap inflationary pressures in New Zealand. Going forward, commodity currencies could remain under pressure as the conflict in Ukraine escalates and roils global markets. That said, rising commodity prices buoyed by fear that sanctions on Russia could disrupt supplies from one of the world’s largest producers of oil and gas could limit their downside. In the coming week, investors will be looking out for the Reserve Bank of Australia’s and Bank of Canada’s official statement on cash rates, as well as GDP data release in Australia and Canada.

4. WTI crude futures settled at $91.59 per barrel on Friday, after crude oil prices topped $100 per barrel over the week as the situation continues to develop in the Russian-Ukrainian crisis. Oil prices could potentially see high volatility and potential for further squeeze given the developments in Eastern Europe in the coming weeks, with investors watching the upcoming OPEC-JMMC meetings closely. Data also showed that US crude stockpiles at Cushing, Oklahoma, continue to decline which could support a further price rally. Investors are also closely monitoring the Iran nuclear talks, which could see Iran supply over more than a million barrels per day to help ease a tight global market if a nuclear deal is reached. On the other hand, gold prices retreated from its high to below $1890 per ounce as the week came to a close. However, with increasing uncertainty over geopolitical risks and high inflationary pressures, we could see a further upside for the safe-haven asset traditionally used to hedge against inflation.