FX Update: Euro kneejerk reactions to hopeful headlines are revealing FX Update: Euro kneejerk reactions to hopeful headlines are revealing FX Update: Euro kneejerk reactions to hopeful headlines are revealing

FX Update: Euro kneejerk reactions to hopeful headlines are revealing

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Headlines suggesting progress in peace talks between Ukraine and Russia in Turkey have triggered a bounce in risk sentiment, and in currencies, mostly a bounce in the euro. The patterns are revealing, even if this round of talks fails to lead to a cease-fire in Ukraine or better. Elsewhere, yields have been quick to jump back higher as the Fed still has its work cut out to catch up with the curve.

FX Trading focus: Headline reaction to Ukraine cease-fire hopes revealing. Weak sterling, Fed still behind the curve

Note: Ukraine-Russia talks winding down just before I am posting today’s piece below, with even more promising headlines suggesting a Russian is prepared to de-escalate around Kyiv and Chernihiv…

A solid recovery for the euro today materialized on a seeming focus shift from Russia on its ambitions in Ukraine towards more limited objectives in the Donbas region and Crimea, as well as on some of the statements emanating from peace talks in Turkey between the two sides. We’ll need more concrete progress here and a solid drop in energy prices to discuss proper recovery prospects, but the headline reactions are nonetheless revealing: first, the chief reaction function has been for the euro to jump higher, also versus the Swiss franc today, with the magnitude of that move suggesting some pent-up demand awaiting for these kinds of potentially promising developments, as well as some residual safe-haven status for the franc, something we find a bit surprising.

As noted some time back when EURCHF recovered so sharply off the lows earlier this month: the Swiss franc’s status as a safe haven has become heavily compromised by Switzerland joining sanctions against Russia, yet another milepost in the long arc of erosion of the banking secrecy and “no questions asked” policies of Switzerland and its banking system after the country long ago struck deals with tax authorities in Germany and the US. As well, the recent sharp recovery in global bond yields should have been a more pronounced CHF-negative. Regardless, it’s too early to know whether this headline is a sign of more promising developments for Ukraine and eventually for energy and power price inputs for the Euro zone economy. Today, Russia has been out again banging on about ruble payments for natural gas exports after G-7 representatives rejected the idea yesterday.

The euro was also sharply higher against the Japanese yen (EU yields jumping, BoJ still sitting on its yield caps) and against sterling. The latter is also interesting, in that the UK would also stand to benefit from a peace deal if this eventually sees energy prices lower – other forces may be at work here in addition to the Ukraine war impacts. I discussed the Bank of England stance in yesterday’s update after Governor Bailey fretted an “historic shock to real incomes” that makes it clear that the bank is only reluctantly tightening as the UK lurches toward a recession. The extremely negative terms of trade drag from high import prices, post-Brexit supply side limitations on real growth, and a growing fiscal drag also dog the sterling outlook. Meanwhile, the new EU and German fiscal outlays are going to at least support nominal EU growth and quite heavily so this year and for the foreseeable future, helping more of the EU yield curve into positive territory. Today, even the German 2-year Schatz is nearly in the positive yield column, trading at a mere -2 basis points. EURGBP has pulled higher, as discussed below.

Of course, this euro recovery could all turn around in a heartbeat if the hopes ginned up today’s headlines on talks lead to nowhere, but it is a dry run for what could happen if the war situation shifts dramatically for the better. The progression might look like: first a cease-fire that vastly improves the humanitarian situation. Second, perhaps at least a partial withdrawal of Russian forces from the non-Eastern areas at minimum and finally, negotiations centering on limited Russian objectives of Crimea and Donbass. The most important piece for a more stout and sustained recovery in the euro would be a fall in Russian export prices, connected with an easing of the harshest portion of sanctions against Russia’s financial system, particularly against the central bank. What circumstances are required to bring about the last of these is difficult to know.

Elsewhere, the Fed very clear still has its work cut out for it in its quest to tighten financing conditions. Stocks are rallying hard and have taken out key resistance by some measures, and as we discussed on this morning’s Saxo Market Call podcast, signs of full speculative froth are increasingly in evidence once again. High yield credit conditions have actually eased powerfully over the last couple of weeks and equity market volatility is falling like a stone. Watching the US March Conference Board Consumer Confidence number with interest, even if the market my not be, as the month saw the full impact on energy prices from the Russian invasion of Ukraine. If risk sentiment remains aggressively bid in coming days, the risks of an inter-meeting Fed move may rise quickly as it is a long wait for the May 4 FOMC meeting.

EURGBP has jumped smartly, in part on the downbeat Bank of England outlook as noted above, as well perhaps as the weak outlook for the UK economy, where the fiscal drag will be added to the tightening on real incomes from spiking inflation and from the BoE’s slightly earlier start to the tightening cycle. A potential euro positive from here would be path toward a cease-fire and a settlement that Ukraine finds acceptable (enormous if) and that opens up for hopes of cheaper energy prices for Europe, at least on a relative basis (natural gas prices, chiefly). For now, watching the key local highs into 0.8450+, as well as the 200-day moving average a bit higher that seems to have served as an important resistance level since last September. A break higher could reset the price action towards 0.8750.

Source: Saxo Group

Table: FX Board of G10 and CNH trend evolution and strength.
The JPY weakness is still very prominent and could yet extend further in the near term if a ceasefire breakthrough is achieved in Ukraine and prompts yields to rise higher still. Elsewhere, watching for the prospects of this Euro recovery to extend for the same reasons, while sterling is increasingly limping. Ironically, the Aussie strength could ease for a while if the situation in Ukraine takes a strong urn for the better as it has received a “war premium” from a commodity-exposure angle. (EURAUD, AUDSEK)

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Note SEK picking up a bid on the EUR recovery – and GBPSEK is in a tailspin. Gold and silver are in danger of turning lower here – with a key pivot zone around 1,900 and slightly below in XAUUSD. Note the EURGBP turning to positive on the close yesterday and following through higher today, and EURCHF making a bit at turning positive in the Trend reading.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights (all times GMT)

  • 1300 – US Jan. S&P CoreLogic Home Price Index
  • 1300 – US Fed’s Williams (Voter) to speak
  • 1400 – US Feb. JOLTS Job Openings
  • 1400 – US Mar. Conference Board Consumer Confidence
  • 1445 – US Fed’s Harker (Non-voter) to speak
  • 0000 – New Zealand Mar. ANZ Business Survey

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.