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Europe set for a higher open as markets weigh up next move

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Yesterday’s underwhelming response by Western leaders to Russian President Vladimir Putin’s actions on Monday night saw European equity markets rebound from their lows to finish the day mixed.

The uncertain response appears to be about what constitutes an invasion, in particular with respect to the disputed regions. Given that Russia has, up until this week, denied the presence of its forces in Donbas and Luhansk, and now has admitted its forces are there, it comes across as pedantry at best.  

While it's always sensible to react cautiously when responding to a provocation, when you spend most of the last few weeks’ warning of “massive” sanctions, it rather undermines your narrative if you fail to deliver them when your warnings are ignored.      

The reaction of US markets played out in a similar fashion initially, however they rolled over again after markets in Europe had closed, after Putin got his own parliament to rubber stamp approval for Russian troops to operate outside the country, thus making further escalations much more likely.

US President Biden later went on to widen the scope of US sanctions to include Russian bank VEB, as well as sanctioning Russia’s sovereign debt, however that was as far as it went, with no major banks targeted, and no threats to remove access to the SWIFT payment system, although that could be being held back until later.  

The US President also went on to say that the US would be authorising the deployment of additional forces and equipment to bolster the Baltic states, in order to reinforce NATO’s borders, although he once again stressed that US troops would not step on Ukrainian soil.

This lack of severity when it comes to further sanctions initially saw US markets start to rebound, however the backing by Putin of separatist claims to the whole of the Donbas region, and not just the areas they occupy, sent markets lower again towards their January lows, as the realisation dawned that further military escalations were now much more likely.

As sentiment continued to ebb and flow, markets in Asia edged cautiously higher, and this looks set to see markets here in Europe do the same, as we look to how and when the next development plays out.

Yesterday we heard from Bank of England deputy governor Dave Ramsden who warned that he expects to see further tightening in the months ahead.

He was one of the MPC members who voted for a 50bps rate hike earlier this month and appears to suggest that while any decision on further hikes is finely balanced, he probably hasn’t changed his mind on further tightening in the short term. He did, however, push back on market expectations of faster increases, although we can still expect to see another 25bps when the MPC meets on March 17th

Later today we get to hear from Bank of England Governor Andrew Bailey, as well as MPC members Ben Broadbent, Jonathan Haskel and Silvana Tenreyro when they testify to MPs on the Treasury Select Committee, with the topic of interest rates, and the cost of living likely to be on the agenda.    

EUR/USD – found support just above the 1.1270 area yesterday. Still range trading with resistance near the 1.1420 area. A move through 1.1420 retargets the highs at 1.1485. A move below 1.1270 retargets the lows this year at 1.1120. 

GBP/USD – fell back to the 50-day MA yesterday before rebounding. Needs to move towards 1.3640 and break higher towards the 1.3720 area and 200-day MA. Support comes in at trend line support at 1.3450, from the December lows.

EUR/GBP – rebounded from the 0.8310 area, but while below the 0.8410/20 area the bias remains for a move back towards the recent lows at 0.8280.

USD/JPY – found support at the 114.50 area, trend line support from the September lows. We have resistance just above the 115.20 area as well as 115.80.


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