UK to increase sanctions on Russia
28th February: Highlights
- England reopens, but inflation continues to rise.
- Ukraine’s invasion complicates Fed’s choices
- Invasion to take a half percent off growth
Population backing stronger measures
With the country still reeling from rising inflation, soaring energy bills and increased taxes, the effect on the country of the Russian invasion of Ukraine is still unquantifiable.
There is little doubt that it will deliver lower growth as the global economy, which will feed through into every developed nation.
BP announced yesterday that it will offload its 19.5% stake in Russian oil firm Rosneft following Russia’s act of aggression. BP commented that the decision had been taken amid unprecedented political pressure.
With a significant range of sanctions being introduced in response to Russia’s invasion, possibly the most significant will be the exclusion of the country from the SWIFT international payments network.
Swift has been around since 1973 and has kept its place by innovation in technology. It is hard to see how Russia will be able to navigate a path around the payments network, and this may be the response that has the most effect.
The UK financial markets infrastructure is beefing up its security in case Russian retaliation to the sanctions comes in the shape of a cyberattack. Several recent attacks have been credited to Russia, and the West is concerned about what State Sponsored activity may be started.
The UK has no significant data releases this week to distract the market from the Ukrainian crisis. It is likely that the pound will be driven by the market’s risk appetite, which saw the pound fall only to recover a little on Friday. It appears that traders believed that Thursday’s precipitous fall was overdone.
Sterling rose to a high of 1.3438 on Friday, closing at 1.3413 in what continue to be volatile markets.
Biden team want to rattle their sabres
Putin has ignored any concerns about the threat of nuclear weapons by those opposed to his country’s actions and has made chilling threats to any nation that wishes to halt his ambition.
President Biden appears weak by comparison, not being able to react in the traditional way. Putin has stolen a march on NATO by attacking Ukraine and is prepared to ignore global condemnation.
There is nothing Washington can do in the short-term, other than watch as Ukraine edges ever close to being engulfed back into a 21st century version of the Soviet Union.
It is unclear if Putin’s ambition will be sated by taking over Ukraine as now seems likely, despite the fear that he will turn his attention to the Baltic States despite their membership of NATO. he will more likely exert pressure in a more subtle way in those countries, should we wish to continue.
In the U.S. and away from the conflict, this week may be pivotal in the Fed’s decision to turn its attention to countering inflation. While growth in the country is expected to be adversely affected by the conflict, Jerome Powell will testify on Capitol Hill this week about the country’s economic position.
While he won’t go as far as confirming either the date or the size of any tightening of monetary policy, it is clear that it is the intention of the FOMC to hike at its next meeting, which takes place in a couple of week’s time.
Several FOMC members have spoken recently of their belief that inflation needs to be attacked with a kind of economic shock and awe, in which any hikes are front loaded for maximum effect. The markets are coming round to the idea that the first and possibly second hikes will be of fifty basis points.
Economists are concerned that such action will slow the economy too much and given the current environment could lead the country into recession.
Powell will most likely confirm that risks are now to the downside for the economy but will express the need to be tough on inflation.
Following a significant upside surprise last month, this week’s release of the February employment report is eagerly expected. First the market will be looking for any revision to the January number, then, if that number is close to unchanged, there will be expectation of a continuation into February.
Current predictions are for the addition of around 425k new jobs.
Last week, the dollar index was supported by a fall in global risk appetite. It climbed to a high of 97.73, closing at 96.56.
Russia is likely to use energy as a response
It is unclear whether such action from Brussels was expected by Vladimir Putin, but it means that Ursula von der Leyen and her colleagues must expect some reaction. It is most likely to come in the form of some kind of reduction in supply of energy or possibly a cyberattack.
Germany, France and Italy are the three states most at risk from any reduction in supplies of gas in particular. Germany imports 90% of its gas, with half of that coming from Russia.
This interdependence has been growing for a considerable time. Germany has an insatiable need for energy for both industrial and domestic purposes and its economy, already facing a contraction through the effects of the Pandemic as well as decades high inflation.
Russia would also face economic uncertainty were it to turn off the tap supplying Germany.
Its economy more reliant on energy sales year by year and despite it being precluded currently from the global financial market, it will need to earn foreign exchange going forward to finance the goods it has to import to continue to grow.
Germany has been a willing participant in discussion with the rest of the EU, despite it being more heavily involved with Russia than nearly every other member.
Olaf Scholz has been expected to cope with yet another bolt from the blue but has so far shown himself to be a capable leader.
The EU faces a severe crisis going forward, although here is currently no question of either the EU or NATO becoming militarily involved in the ongoing conflict.
Reports confirm that Christine Lagarde is keeping a close watch on the situation in Ukraine. This could mean that the Central bank continues its current support through bond purchases until the end of the year, and possibly beyond.
That would see any need to fight inflation be abandoned, at least temporarily. Last week, the euro fell versus the dollar, primarily due to falling risk appetite but also due to the region’s proximity to the conflict and the potential fallout from any overspill.
It fell to a low of 1.1106 and closed at 1.1265. It has opened close to the bottom of that range again and keeps the potential to test the crucial 1.10 level.
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”