Daily Brief

Oil surges (again), as sanctions escalate

U.S and UK (finally) ban Russian oil imports

After some fairly hectic sessions over the past few weeks, a somewhat calmer market reflected yesterday’s trading environment. This welcome relief came despite countries taking the decision to ban Russian oil imports, after days of deliberating. The move was led by the U.S, with the UK following suit fairly swiftly after. The UK will phase out its Russian imports by the end of this year. Europe needs a better plan ‘B’ before they can join the party.

Whilst the decision to ban imports of energy products has not been taken lightly, given the additional shock the move will add to an already rampant energy market, the need to increase the pressure on Russia for the invasion in Ukraine by increasing sanctions, was deemed worthwhile. Oil probed higher, as you might expect, but perhaps importantly remained below the cycle top set on Friday.

 

Time to look behind the sofa, Rushi

Back at home, the economic effect of the war in Ukraine is already starting to bite, and Rushi Sunak, the UK Chancellor, is coming under mounting pressure to cut taxes in the UK, in an attempt to help offset the obvious increase in the cost of living. Energy prices had already been piling the pressure on household budgets, well before the war in Ukraine sent energy prices further skyrocketing. Furthermore, the need for countries (such as the UK) to increase spending on defence will also eat into an already tight public purse, as the Chancellor prepares to announce the spring economic statement on the 23rd March.

 

Dollar declines (a bit)

For currencies, the calmer environment resulted in a slight pullback for the greenback after the impressive 3-week rally. Having touched a low of 1.0800 on Monday, EUR/USD therefore found a modicum of support and regained 100 pips or so of the losses through yesterday.  Baby steps, but it is nice to see some blue on the screens today. Whilst the latest Euro area GDP expanded by 0.3% in Q4, as expected, the rather backward-looking data was never really going to make a material impact. Furthermore, tomorrow’s ECB meeting is perhaps also encouraging some position squaring, but the ECB are still likely to retain ‘maximum flexibility’ at the meeting, leaving the single currency at the mercy of headline tennis afterward from the Ukraine war, given Europe’s proximity to the conflict.  

 

..But not against the pound

Sterling couldn’t quite match the single currencies gain, however, and GBP/USD has remained heavy after succumbing to a move below 1.3200 in that strong move lower on Monday. The UK economy (see above) is deemed particularly vulnerable to the unwelcome prospect of stagflation, and that is likely to be a further weight on the pound.

Elsewhere, most major currency pairs reflected the broader ‘risk on’ tone in markets. The JPY lost some of its recent gains against the pound and EUR, with USD/JPY continuing to hold above the 115.00 region. It was a similar story for the Swiss Franc, with EUR/CHF marking its second daily gain for the first time since the beginning of February.

 

Australia declares a national emergency in response to the floods

The Aussie has moved higher over the past day, which is pretty impressive given that PM, Scott Morrison, has just declared a national emergency in response to the shocking floods in New South Wales. The economic effects will be a drag on growth. AUD/USD is back at 0.7300 today.

 

Data corner

The UK RICS Housing Price Balance is likely to remain elevated around 73-74%, further highlighting the strength of the UK property market. Australian Consumer Inflation Expectations are expected to be maintained around 4.6% this month. The impact of the floods will possibly start to impact the numbers over the next few months.   Elsewhere, it is a fairly light data agenda today, with the US JOLTS job openings, U.S Crude Stocks changes and Japanese PPI data set for release.

 

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