The financial markets continue to be concerned over the ongoing Russia/Ukraine war and the potential negative impacts a protracted conflict might have on the global economy and inflation.

Yesterday a third round of talks between the two nations failed and a full ceasefire continues to be out of sight. Russia have said they would immediately stop their military campaign if Ukraine agreed to their list of demands which includes acknowledging Crimea as Russian territory, conceding separatists regions (such as Donetsk/Lugansk) as independent states, and agreeing to remain neutral (i.e., forbidden to join Nato).

Investors have continued their flight towards safe-haven assets and in the currency markets there’s also been a clear move towards energy exporting countries over net energy importers. Consequently, the Euro has lost a lot of ground due to the region’s heavy reliance on Russian gas and oil imports (e.g EU gets 40% of its gas from Russia vs the UK’s 5%). Traders are also concerned that a slowdown in Eurozone economic growth is going to delay the ECB from normalising monetary policy (i.e. rate hikes potentially pushed further out), which has reduced the appeal of the Euro.

Some technical analysis would suggest the Euro has moved into oversold territory; however, the fundamental view shows that the shared currency might struggle to stage any major short-term resurgence without an imminent end to the military conflict (or major shift in market risk appetite). This morning Russia have threatened to close its main gas pipeline to Germany should the West impose a ban on Russian oil. The EU are reportedly looking into cutting their Russian gas imports by two thirds over the next 12-mths. However, on a more risk-positive note, Bloomberg have just reported that the EU were looking into holding a massive joint bond sale to raise funds for increased energy and defence spending.

As a result, the EUR/USD is trading around the lowest levels since May 2020 and the GBP/USD around the lowest levels since November 2020. The GBP/EUR had hit the highest levels since before the 2016 Brexit vote and remains buoyant.

The markets will continue to closely monitor how things develop with the Ukraine/Russia conflict. Thursday’s talks in Turkey between the Russian and Ukraine Foreign Ministers will be a key focus, along with the European Central Bank interest meeting on the same day.

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