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The US dollar index continued its bullish trend on Monday morning as investors priced in a more hawkish Fed after the strong jobs numbers that were published on Friday. The data revealed that the American labor market continued to tighten in February as the country reopened. In total, employers added over 600k jobs while the unemployment rate dropped to about 3.8%. The participation rate also edged upwards. The only major blemish in the jobs report was wage growth, which retreated from 5.5% to 5.1%.

The euro continued its bearish trend against key currencies as fighting continued in Ukraine. The Russian invasion has led to mass migration from the country. At the same time, it has led to a significant period of high inflation as oil and gas prices have surged. Just last week, data by Eurostat revealed that inflation in the region is currently at the highest point on record. This inflation at a time when unemployment is so high it could lead to stagflation in Europe. Later today, the key data to watch will be German retail sales and factory orders.

The economic calendar will be a bit muted today meaning that investors will continue focusing on the crisis in Ukraine. The key data to watch will be the UK home price index that will be published on by Halifax. Last week, the number by Nationwide showed that the country’s house prices continued to rise in February. The next figure to watch will be the Swiss unemployment rate data. Analysts expect the data to show that the rate remained intact at about 2.3%. On Friday, the SNB chair said that the bank was trying to find out how to weaken the Swiss franc.

EURCHF

The EURCHF has been in a strong bearish trend in the past few months. And on Friday, the pair settled to the lowest level in years. It is trading at 1.002, which is significantly below this week’s high of 1.0611. The pair has moved below the 25-day and 50-day moving averages while the RSI and the Chaikin oscillator have moved to the lowest level in months. Therefore, the pair will likely continue falling.

EURUSD

Like the EURCHF pair, the EURCHF has crashed to the lowest level since 2020. On the daily chart, the pair has moved below the 25-day and 50-day moving averages. It has also moved below the key support level at 1.1100, which was the lowest point this year. Oscillators have also continued falling. Therefore, the pair will likely continue falling as bears target the next key support at 1.0900.

NZDUSD

The NZDUSD pair has jumped sharply in the past few days as commodity prices have jumped. The pair is trading at 0.6860, which is the highest it has been since January this year. It has moved above the 78.6% Fibonacci retracement level. Also, it has risen above the 25-day and 50-day moving averages while the MACD has also risen. Therefore, the pair will likely keep rising in the coming days.

All eyes were on crude oil prices early this morning following the news over the weekend that the US administration is discussing a potential ban on Russian oil imports with its European allies. Prices soared at the open in Asia, with Brent crude rallying $21 to trade slightly above $139 a barrel before slipping back below $130.

Sanctioning Russian oil would be the most significant escalation in the West's response to Moscow's invasion of Ukraine, and it poses serious negative consequences for the global economy. While Russia's economy will be hurt the most, Europe will likely fall into a recession and US growth will be hit, with consumers feeling the most pain.

In 2008, demand destruction occurred when prices approached $140. Brent crude actually hit $147.50 in July 2008, shortly before the global financial crisis. Adjusting for inflation, prices need to go above $200 to have a similar effect on consumption. However, the current spike in prices is not a demand-driven shock but a supply-driven one, and there's no ceiling in sight.

Russia currently exports approximately 4.5 million barrels of crude. If exports were cut in half, prices would likely remain elevated in the short to medium-term around current levels, even if the US and other nations release oil from their strategic reserves. However, if the crisis gets worse and Europe imposes sanctions on Russian oil with no response from OPEC members, expect prices to jump above $200.

It's not just oil prices hitting multi-year highs. Aluminum, copper, zinc, palladium, corn, and wheat are among the many commodities that have seen a price surge recently. All of which complicates the outlook for central banks across the globe.

Despite rapidly rising inflation, the ECB is likely to delay any plans for tightening policy at its meeting this Thursday. Moreover, the Ukraine war will force the central bank towards a more cautious approach to withdrawing accommodative policies, putting additional pressure on the euro, which has sunk to a two-year low against the dollar and tested parity against the Swiss Franc for the first time in seven years.

The rush to safety has sent 10-year real yields back to extremely low levels of -0.90%; meanwhile, 5-year breakeven rates topped 3.2% for the first time ever. This reflects the nervousness in bond markets about stagflationary pressures, which also sent gold prices above $2,000 momentarily.

Expect the Ukraine headlines to continue to drive markets over the next several days, with volatility remaining elevated as investors try to find out how this crisis comes to an end.

The Euro fell further in early Monday after falling 1.3% on Friday and registering weekly close below psychological 1.10 level.

The sentiment remains negative, as growing uncertainty over Ukraine crisis and fears of massive impact on European economy from sanctions on Russia which resulted in skyrocketing energy prices, continues to boost risk aversion and keep the single currency under strong pressure.

Bears eye 2020 low at 1.0635 with minor obstacles at 1.0766 and 1.0727 (May, Apr 2020 lows) seen en-route.

Bearish stance is reinforced south-heading 14-d momentum deeper into negative territory and multiple bear-crosses of daily moving averages.

Former key supports at 1.1000/40 (psychological / Fibo 76.4% of 1.0635/1.2349) reverted to strong resistances which are expected to limit upticks and keep bears firmly in play.

Res: 1.0928; 1.0951; 1.1000; 1.1040.
Sup: 1.0821; 1.0800; 1.0766; 1.0727.

Oil markets were under great pressure amid increased demand and falling supply. OPEC+ is unable or unwilling to achieve its self-imposed production targets and insists on limiting production increases by 400,000 barrels per day despite rising prices. In addition, US producers are unable or unwilling to increase US oil supplies.

Inflation is a number one concern for the markets and everyone has a right to fear. Inflation in the US has jumped to a 40-year high of 7.5%. Inflation in the Eurozone hit an all-time high at 5.8%. It is not much different in the UK, where inflation has reached 5.5%, the highest level in 30 years.

The war between Russia and Ukraine has only made matters worse.  If Russian oil and gas supplies are interrupted due to sanctions or by order of the Kremlin to respond to the sanctions, this could drive prices crazy, even before we see an actual impact on demand from the disappearance of Russian oil from the market.

Crude oil soars towards $130 a barrel

Although the sanctions imposed by the West so far do not target Russian energy exports, after the Russian invasion of Ukraine, Russian shipments became toxic for most traders, insurance companies, and tanker owners. Some refiners and traders are concerned about how financial transactions will work after Russian banks are excluded from the SWIFT system. Others are running away to avoid harming their reputation.

To what extent may oil prices rise?

JPMorgan thinks that 66% of Russian oil will struggle to find buyers and expects crude oil prices to reach $185 by the end of the year if Russian oil remains without a buyer. If the Russian energy sector comes under sanctions, or if Germany moves to halt Nord Stream 2 gas pipeline, and if the US fails to reach a nuclear deal with Iran, all of these factors could curb global oil supplies. Together, they will push prices up even more.

What does oil above $125 mean for inflation?

If energy prices go up, inflation will be the first to be affected. This will have fatal consequences for Russia, but it will also increase cost-of-living pressures in the West.

Even before oil prices rose above $110 a barrel, analysts lowered growth forecasts and raised inflation estimates. If Russian energy sector is included in the list of targets, this will mean oil and gas will be more expensive for longer. In the scenario of the oil reaching $150 and remaining above $100 until early 2023, the pressure on consumers will increase. The economy and businesses will also be hit hard, with higher energy costs and lower demand hurting profits. This will increase the risk of turning the economic slowdown into a recession with growing inflation globally.

The US inflation to where?

It is still unknown how the US economy will respond to the oil shock that has sent crude oil prices above $125 a barrel.

The US economy can withstand six months of oil prices at an average of $100, although it may deepen the inflation problem. However, it is almost certain that if oil remains around $125, it will lead to a halt in growth and higher unemployment rates, which could turn into a recession. Another question is how central banks will respond to rising oil prices. Federal Reserve Chairman Jerome Powell said events in Ukraine would not stop the US central bank's plans to start raising interest rates. What is not yet clear is the extent and the speed of rate hikes.

Finally, the economic impact of the invasion of Ukraine will come in the form of slowing US economic growth with higher inflation, while the European economy may enter a recession. Russia will plunge into a deep double-digit recession.

The US dollar index rose to 99.00. For now, the greenback enjoys safe haven demand. Support is at 97.50.

The Dax 40 plunges for fears of stagflation in the eurozone. The index has ventured further into the bearish territory after it broke below March 2021’s lows around 14000.

The liquidation is yet to end as sentiment remains downbeat. A break below the psychological level of 13000 would trigger a new round of sell-off to 12000.

The RSI’s oversold situation from both daily and hourly charts may cause a limited bounce if short-term traders take profit. 13500 is the first resistance ahead and could attract more trend followers.

Gold rallies as investors’ flight to safety continue. The bulls have tempered their aggressiveness after the initial surge.

The latest pullback has been an opportunity to accumulate against a bullish backdrop. Price action continues to climb along the rising trendline which suggests that the direction is still up.

A break above the psychological level of 2000 would bring in more momentum traders. In fact, that would send the price to August 2020’s high at 2075. Between the trendline and 1930 there is a key demand zone.

The US dollar softens as the Fed may settle for a less aggressive rate hike agenda. The recent sideways action is a sign of the market’s indecision.

Sellers’ previous attempts to push below 0.9150 have met some buying interest in this demand zone. A definitive breakout may send the pair to January’s lows around 0.9100. Then the path of least resistance could be down, ending a three-month-long consolidation.

0.9230 is the immediate resistance and 0.9290 is a major hurdle before the greenback could bounce back.

EUR/USD

During the early hours of today’s trading session, the sellers prevailed and the support at 1.0900 was successfully breached. At the time of writing this analysis the euro continues to lose ground against the U.S. Dollar and the expectations are the bearish trend to continue heading the pair towards a test of the next significant support at 1.0800. In the upward direction, if bulls re-enter the market, the correction should be limited to the first resistance level at 1.0900. This week, the investors will be expecting the announcement of the European Central Bank interest rate decision (Thursday; 12:45 GMT) and Lagard’s press-conference shortly after that.

USD/JPY

The support zone at 114.75 withheld the bearish attack and the U.S. Dollar recovered some of its recent losses and, at the time of writing, the pair is trading above the mentioned zone. A test of the resistance at 115.18 is highly possible but if the bullish momentum fades, then a successful test of the support zone at 114.75 could lead to a downward movement towards a test of the next support at 114.50.

GBP/USD

In the early hours of today’s trading session, the appreciation of the U.S. dollar continued and, the pair successfully violated the support zone at 1.3214, and if the bears manage to maintain their control over the market, a test of the next support at 1.3150 is a possible scenario. However, if the bulls re-enter the markets we may witness a corrective move towards the resistance at 1.3271.

EUGERMANY40

The German index began the day with a new sell-off and over 3% decrease in its price. The panic sell-offs caused by the uncertain situation with the conflict between Russia and Ukraine seems to continue and the bulls cannot manage to gain control to limit downward movement. The expectations are the sell-offs to deepen and the index to head towards a test of the psychological level at 13000. High volatility could be expected during today’s trading session and, if the bulls manage to take control over the market, then the price could make a corrective move towards resistance at 13300 before the bear's pressure continues.

US30

After recovering from Friday's session, the U.S. blue-chip stock index opened with a negative gap today, losing more than 1.1% of its value at the time of writing. The losses were largely driven by the growing concerns about the economic consequences spurred from the Russia - Ukraine conflict. A confirmed breach of the 33147 area would open an opportunity for the bears to instigate an additional sell-off and to attack the next support zone at around 32700. Negotiations between the warring parties remain at the forefront, the outcome of which would be the main factor determining the future of the index. Any planned economic news this week that could affect the volatility of the U.S. index has already been mentioned in the EUR/USD analysis.

Markets

US February payrolls on Friday came in better than expected and saw an upward revision for January too. The Fed is set to kick off the hiking cycle next week, even as wage growth came to a standstill (m/m) last month. Markets couldn’t care less though, with all attention still going to the geopolitical narrative. Alleged Russian shelling at Europe’s biggest nuclear power plant unnerved investors already at the start of Friday’s trading day. Risky assets were sold once again, with Europe in focus. The EuroStoxx50 slid almost 5% and lost support at 3608. US indices lost up to 1.7% in the Nasdaq. Commodities soared. Brent closed just below $120/barrel. Reports of the US discussing a Russian oil embargo fueled already very vivid concerns about shortages. Core bonds enjoyed safe haven bids. US Treasury yields slid with the belly of the curve outperforming. Declines ranged from 5.3 bps (2y) over 6.3 bps (30y) to 10.9 bps (7y/10y). The 10y reference tested 1.70%.  German yields slipped 8.9-13.4 bps with the 10y yield closing near first support around -0.07% and eying a return to -0.11% (New Year gap). The euro continues to fall of a cliff. It lost against all G10 peers. EUR/USD went from 1.1068 all the way to the low 1.09 area. It’s the lowest level for the pair since May 2020. EUR/JPY closed at 125.55, losing the 128 support definitively. EUR/CHF was in proximity of parity (1.002). Less than one month ago, the pair filled bids in the 1.06 area. Not even EUR/GBP (0.826) stood a chance, giving up on 0.8282/0.83 decisively. The few that were even worse off were all situated in Central-Europe. The forint set a new record low at EUR/HUF 387.4. FX interventions in Poland and the Czech Republic did little to help the zloty (EUR/PLN closed at 4.897) or the koruna (negligible gains to EUR/CZK 25.69).

The new week unfortunately didn’t bring much change, on the contrary. Screens are flashing red with the same flows seen last week. Asian equities accumulate losses up to 3%. European futures suggest a similar open, which would bring the EuroStoxx50 officially into a bear market (>= 20% declines from the previous cycle top). Core bonds inch higher. The dollar gains, the euro weakens. EUR/USD is trading sub 1.09. EUR/CHF dived under 1 for a few hours this morning. SNB board member Maechler in an interview published last weekend said that the central bank is ready to intervene in the FX market to address the rapidly strengthening franc. Oil prices exploded overnight. Brent almost hit $140 at the open before paring gains to a still-whopping $130/b – the highest level since 2008. Copper hits a new record high. We fear doom and gloom sentiment will stay around for some time to come. Germany’s 10y yield is ready to wipe out all 2022 gains, EUR/USD is preparing for a return to the 1.06/1.08 area from a technical point of view and doesn’t have to count on the ECB for a directional change. Frankfurt on Thursday will most likely put any normalization plans on hold until the geopolitical sky clears up a bit.

News Headlines

In a working report to the annual meeting of the Parliament, Chinese Prime Minister Li Kequiang proposed a growth target for the Chinese economy of  about 5.5% this year. Last year China targeted economic growth of over 6%, but finally 2021 growth printed at 8.1%. China for this year again targets CPI inflation of about 3.0% and a budget deficit of around 2.8% of GDP. The latter probably leaves room for further fiscal stimulus if needed. Chinese authorities face a difficult balancing act this year. The country is expected to stimulate the economy by easing controls on the real estate and supporting infrastructure projects.  But authorities need to keep debt levels in check. Last year export growth was an important driver for growth. Data this morning showed that exports over the first two months rose 16.3% Y/Y while imports slowed to 15.5%. This resulted in a further widening of the trade deficit to $115.95 bln (YTD). After opening mostly lower, the yuan rebounded, with USD/CNY currently again trading near 6.319.

US policy makers indicated that they are exploring measures that could lead to a ban of Russian oil imports. US Secretary of State Anthony Blinken on Sunday indicated that the US was examining measures with European allies. However, according to sources, the US could starting implementing the ban on its own. In this respect, Blinken also indicated to maintain of a steady oil global supply of oil, which could be important for Europe which is more depended on Russian energy supply. Brent oil jumped close to $140 p/b overnight.

The week starts with a 10% rally in US crude prices after the US Secretary of state Blinken said that the US and its allies now consider an embargo on the Russian oil.

The market mood is red, again, this Monday. Cutting off the Russian oil will increase the positive pressure on oil prices and will likely send the price of a barrel above $150 in the foreseeable future. The extended rally in oil and commodity prices will likely bring the European economies to ration consumption and weigh on the economic recovery and the corporate earnings in 2022.

Activity in European futures hint at an ugly start to the week. US equities are also poised to open in the red, yet losses could be more contained as the US economy’s exposure to Russian oil is significantly less than the European. While the Russian oil stands for 30% of European oil supply, the US economy imports only 3% of its oil from Russia.

Safe havens fly high

Bitcoin slipped below the $40K mark during the weekend, and the safe haven flows didn’t come to the rescue, whereas the traditional safe haven assets are heavily in demand since the opening bell, with the US dollar index preparing to flirt with the 100 mark for the first time since May 2020, and the gold hitting $2000 an ounce.
Ready to address the strong franc BUT

Swiss franc, on the other hand, sees very important safe-haven inflows. The euro-swissy fell below the 1 mark for the first time since 2015.

It’s hard to tell how the Swiss National Bank (SNB) will react to the sudden franc appreciation.

SNB Governing Board Member Andréa Maechler said that the bank is ready to intervene and address rapidly the strengthening franc, yet the strong franc also helps Switzerland fight back the globally spiking inflation. Inflation in Switzerland spiked above the 2% level for the first time since the subprime crisis, but the actual levels remain acceptable when compared to 5.1% in the Eurozone, and the expectation of an advance near the 8% in the US.

There will certainly be an effort to stop the franc appreciation near the 1 level against the single currency, however, if price stability is the SNB’s top priority, the Swiss policymakers may not get too aggressive on the FX front.