Reports of ceasefire violations in the disputed territories of Ukraine and the lack of reliable data that Moscow has withdrawn troops from the border does not fully eliminate the geopolitical premium in risk assets and apparently offers some support for the dollar and defensive assets. A quick diplomatic resolution to tensions now looks unlikely, adding to the Fed’s growing bias to tighten policy more and faster, risks to the dollar are skewed to further strength.New headlines about the de-escalation of tensions related to Ukraine conflict in the last two days made an impression mainly on the foreign exchange market. The US equity market yesterday was in search of positive catalysts, however, having found nothing interesting, it closed not far from the opening. The release of the report on US retail sales had a slightly negative effect on the market (sales growth was materially higher than expected), which, however, was largely offset by the release of the minutes of the last Fed meeting.The content of the minutes failed to clarify the prospect of a 50 bp Fed rate hike in March, the Fed was also reluctant to send message to the markets that it’s overly concerned about recent pace of inflation. The only hawkish hint was that the pace of selling assets from the balance sheet may be higher than in the previous period from 2017 to 2019. The market regarded this as an unwillingness to signal a rate hike by 50, and since shock decisions are not typical for the US Central Bank, the likelihood of an aggressive step in normalizing policy has decreased. Interest rate futures have revised their odds of 50 bp move from 60% to 30%:However, little informativity of the Minutes increased weight of the upcoming March Fed meeting. Since the Central Bank, in fact, postponed potential policy surprises for the market until the next meeting, a bearish USD bet with a horizon of a month or more looks risky. A comfortable level for purchases looks like 95.50-95.40 on the dollar index, where the main ascending trend line resides:The economic calendar for today includes data on US home sales and jobless claims, a speech by the Fed’s tough monetary policy advocate Bullard. Headlines on Russian-Ukrainian tensions are likely to remain a key driver of risk demand in the short term.For EURUSD, yesterday’s test at 1.14 turned out to be unsuccessful and this level of resistance looks reliable given the current level of geopolitical tension. The pair may slide lower towards 1.13 as it becomes increasingly clear that the initial surge of optimism over the resolution of tensions in Ukraine may have been excessive.The 1.36 level proved to be difficult for the GBPUSD to conquer, however, incoming data on Britain, in particular the latest CPI release, create fertile ground for a quick normalization of policy by the Bank of England. The upcoming meeting in March may contain many surprises, especially the pace of further rate hikes this year, which is likely to increase the resistance of the GBPUSD to selling and ease the climb.
Source: Tickmill
