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CAPITALDIGEST, MARKET REVIEW 3RD MARCH 2022.

MONDAY 28/2/2022 – STERLING RISES AGAINST THE EURO AFTER WESTERN SANCTIONS ON RUSSIA Sterling rose against the euro but was little changed against the dollar on Monday after Western nations imposed tough new sanctions on Russia for its invasion of Ukraine. Western allies acted over the weekend to block certain Russian banks’ access to the SWIFT international payments system and announced plans to implement restrictions on the Russian central bank’s international reserves. Against the euro, sterling was up 0.5% at 83.64 pence at 1515 GMT as the single currency weakened following the sanctions. Sterling recovered against the dollar to trade broadly unchanged at $1.3419 as ceasefire talks between Russian and Ukrainian officials began at the Belarussian border. “GBP has been holding up surprisingly well – given that it is normally more sensitive to financial developments than others,” ING Global Head of Markets, Chris Turner told clients. “Investors will be interested to see whether BP’s planned sale of its stake in Rosneft has any FX implications”, he added. Energy company BP said it plans to exit its Russian oil and gas investments, the most aggressive move yet by a company in response to Moscow’s invasion of Ukraine. The impact of the invasion on the Bank of England’s future path for interest rates continues to be a theme in the near-term. Bank of America said they observed a concerted pushback on market rate hike pricing last week, with a majority of rate setters appearing to be against hiking in 50 basis point increments.   TUESDAY 1/3/2022 – EURO FALLS TO LOWEST SINCE JUNE 2020 AS RUSSIA’S INVASION OF UKRAINE PICKS UP The euro hit its lowest level against the U.S. dollar since June 2020 on Tuesday and the Russian rouble was down in volatile trading as Russia’s invasion into Ukraine intensified and oil prices surged. The U.S. dollar index , which measures the greenback against a basket of currencies, jumped and was last up 0.6%, as investors flocked to safe-haven bets. Investors were on edge over the latest Ukraine developments. Russia warned Kyiv residents to flee their homes, and Russian commanders shifted tactics to intensify the bombardment of Ukrainian cities. read more Brent oil futures had their highest close since August 2014 amid energy shortage concerns. A global agreement to release crude reserves failed to ease worries about supply disruptions from Russia’s invasion of Ukraine. read more “The likelihood of a ’70s-style global oil shock is growing, and investors are moving to safe havens as fast as they can,” said Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto. “The euro is on the front lines here, most exposed to energy shock,” with the euro falling as oil and gas prices jump, he said. Russia’s invasion of Ukraine is the biggest assault on a European state since World War Two, and has resulted in Western sanctions that include cutting off some Russian banks from the SWIFT financial network and limiting Moscow’s ability to deploy its $630 billion of foreign reserves.   WEDNESDAY 2/3/2022 – STERLING RISES VS EURO, FOCUS ON ECONOMY, RATE HIKE BETS Sterling rose against a weakening euro on Wednesday, with investors focusing on market bets on UK and euro zone rate hikes amid concerns about the economic impact of the war in Ukraine. The pound edged higher also versus a rising dollar while investors continued to rush into safe-haven assets. The European Union said on Wednesday it was excluding seven Russian banks from the SWIFT messaging system, but stopped short of including those handling energy payments, in the latest sanctions imposed on Russia. read more Russia can still send oil and gas to Britain despite a ban on the country’s ships visiting British ports, the Department for Transport (DfT) said. read more The repricing lower of the UK tightening cycle “should leave GBP a little vulnerable, as should its status as a currency that is more sensitive to financial risks/equities, given the size of the financial sector in the UK economy,” ING analysts said. Money markets are currently pricing in 115 basis points (bps) of UK rate hikes this year compared with about 130 bps before the Russian invasion, while discounting 25 bps of rate hikes from the European Central bank by December 2022, from around 35 bps. IRPR   THURSDAY 3/3/2022 – STERLING HITS HIGHEST SINCE 2016 AGAINST EURO, FALLS VERSUS DOLLAR Sterling hit its highest level against the euro since 2016 on Thursday but weakened against the U.S. dollar as traders weighed the impact of Russia’s invasion of Ukraine on monetary policy. The Bank of England remains likely to hike its interest rate for a third consecutive meeting this month but expectations of a rate hike from the European Central Bank by the end of the year have declined since Russia invaded Ukraine a week ago. Sterling rose to 82.76 pence against the euro at the start of London trade to its highest level since July 2016. ING’s Global Head of Markets Chris Turner said sterling might also be being supported as Britain-based energy companies looking to cut their exposure to Russia. “It will also be hard to know, but some GBP buying/hedging relating to the divesting of Russian assets in the oil and gas sector may be helping GBP too,” Turner said. BP said this week it would exit its stake in Russian state-controlled energy firm Rosneft, while Shell said it intended to exit its partnerships with entities of Russian gas company Gazprom. Elsewhere, Britain’s services sector expanded at its fastest pace since June, according to the final IHS Markit/CIPS services Purchasing Managers Index. Against the dollar, sterling was down 0.2% to $1.3375 as the dollar was supported by Wednesday’s comments from Federal Reserve Chair Jerome Powell in which he reiterated his support for a 25 basis point interest rate hike this month.   FRIDAY 4/3/2022 – FOREX-EURO TUMBLES FURTHER AFTER NEWS OF FIRE AT UKRAINIAN NUCLEAR PLANT The euro was set for its worst week versus the dollar in nine months, as the war in Ukraine and the prospect of sustained high commodity prices continued to drag on expectations of European economic growth. Adding to worries in early Asian trade was news Ukraine’s Zaporizhzhia nuclear power plant, the largest of its kind in Europe, was on fire early on Friday after an attack by Russian troops. Reuters could not immediately verify the information, including the potential seriousness of any fire. That sent the euro down a further 0.48% to $1.1009 its lowest since May 2020. It has lost 1.84% this week, which would be the euro’s worst week since June 2021. The dollar in turn slipped 0.15% on the safe haven yen on Friday morning, following reports of the fire, though with gains elsewhere, the dollar index, which measures the currency against six peers rose 0.3% Russian forces were continuing to surround and attack Ukrainian cities, on the eighth day of their invasion, including Mariupol, the main port in the east which has been under heavy bombardment. “This war will be devastating for Ukraine. As for Russia, the short and longer-term implications will definitely hurt the economy. But EU countries will also be among those which will be hit the most by these sanctions,” said analysts at ING. They said the effects of surging energy and gas prices could undermine the industrial and private consumption rebound that had been expected following the easing of COVID-19 restrictions, and was also likely to slow European Central Bank policy normalisation.