European indices entered recovery path with a solid rebound after heavy sell-off on Tuesday, greenback, gold and other defensive assets pare down gains amid early signs of de-escalation of Ukraine conflict. This was mainly influenced by the softening position of the country’s leadership on Russian demands, as can be seen from yesterday’s interview with Zelensky. The sanctions rhetoric is weakening, just as the flow of new sanctions against the Russian Federation is slowing down.The strategy of lightning-fast “no-war” of the Russian Federation, as it was called, a week after the invasion, changed to a more measured and unhurried advance, creating and maintaining a tense humanitarian situation in Ukraine, provoking the West to a quick and less controlled economic blockade (in terms of the calculation of consequences), which seems to be bearing fruit, as it results in already rising economic costs and uncertainty for the EU and partly for the US (fuel prices). The sooner the West exhausts the sanctions response, the sooner Ukraine will probably come to the conclusion that further escalation for the West is becoming more and more expensive and their support, in terms of pressure on the Russian Federation, will become scarce, which means that they will have to rely more and more on themselves, which is reason to sit down at the negotiating table. In addition, the pressure of the Ukrainian nation on the leadership to quickly seek a compromise will probably grow.It is also worth noting that escalation through sanctions and their recoil involve considerable supply shocks and central banks responses to them seems to be very limited: monetary easing can affect demand, but is much less able to stimulate commodity supply or output especially outside of the country; higher inflation costs, nevertheless can’t be avoided.Oil prices extended pullback today after a short-term spike towards historical highs earlier this week. API data indicated an increase in inventories of almost 3 million barrels, with an expected decline of 800 thousand barrels. High fuel prices could begin to affect consumer demand, which could also lead to reduced demand from refineries. Data from the EIA report today may show similar dynamics.Among the released economic reports, we should note the smaller-than-expected GDP growth in Japan in the fourth quarter (4.6% against the forecast of 5.6%), as well as the increase in monthly inflation in China to 0.6% against the forecast of 0.3%. The growth of PPI also slightly exceeded the forecast – up to 8.8% YoY.The ECB meeting will be held tomorrow, and market participants will monitor the extent to which the regulator is involved in smoothing the effects of commodity shocks on the EU economy. The stance of the ECB will also provide information on how long the authoritative body thinks the conflict will continue – temporary shocks will not require a response, but changes in policy may indicate the presence concerns of long-term consequences. Raising inflation forecasts and rhetoric including hints of a rate hike this year may allow EURUSD to recover above 1.10. A soft stance is likely to disappoint the markets, as expectations are in favor of the ECB reacting to the consequences of geopolitical tensions.EURUSD, in my opinion, is unlikely to make a sustained break above 1.10 following the ECB meeting, as increased economic uncertainty, despite inflation risks, will force the regulator to take a cautious position again. The current up move should probably be seen as a bounce followed by a move towards new lows:
Source: Tickmill
