Markets early began to put in prices a diplomatic solution to problems in Ukraine, the Russian Federation, and NATO. There was hope for the summit of the presidents of the United States and Russia, which was announced by the head of France, but it did not come true. Neither the Kremlin nor Washington confirmed the possibility of a meeting, while Vladimir Putin on Monday recognized the LPR and the DPR as independent states. The relevant documents were signed immediately after the president's televised address in the Kremlin.
Investors are now on high alert for any escalation of the crisis. Bearish risks for risky assets are quite high, while the dollar and other protective assets should grow in the short term. Taking into account the almost empty economic calendar this week, the main engine of the markets will be geopolitics and the expected rate hike in the United States.
Investors are trying to predict how much the rate will be raised, they are looking for clues in the statements of senior officials of the US central bank.
The head of the Federal Reserve Bank of New York, John Williams, is trying to moderate the expectations of the market, which anticipates a rate hike in March by more than a quarter of a percentage point. Speaking at the University of New Jersey City, he said that he did not see "convincing grounds" for such a significant change in the rate at one time. Investors will now have to figure out what exactly the official means by "convincing grounds". Perhaps we are talking about 7.5% inflation.
Williams is closest to the slow progress on the path of raising interest rates. Fed Governor Lael Brainard is not too hawkish in her views either. Judging by the minutes of the last FOMC meeting published last week, there is still a fear among committee members of "strangling" economic growth with a sharp rate hike.
Investors in the stock market enthusiastically accepted the comments of Williams and Brainard, interpreting them as a signal that the rate in March will not be raised immediately by 50 bps.
Meanwhile, St. Louis Fed President James Bullard sees the need for a sharper and faster rate hike. More active actions should be taken to curb inflation, he believes. The situation may get out of control, and the US will get even stronger inflation at the exit.
Comments are increasingly appearing on the web about the sluggishness of the Fed, which delayed the adoption of measures.
"We are alarmed by the fact that the Fed is putting economic growth at stake with its sluggish actions. And this means an increase in uncertainty about profits. That is why now is a very difficult period. There is still time to fix the situation, but it is running out," said Mohamed El-Erian, a former PIMCO co-ceo and current chief economic adviser to Allianz, PIMCO's parent company.
On Monday, Fed Governor and FOMC member Michelle Bowman spoke on this topic. According to her, the Fed needs to hurry, as inflation is not going to and will not stop on its own. Additional increases are possible in the coming months. Market observers saw in Bowman's comments a signal to raise the rate by 50 bps. Although the official, after hawkish rhetoric, slightly cooled the ardor of investors betting on maximum tightening, noting that it was too early to talk directly about a 50 bps increase in March.
Be that as it may, but the markets have received confirmation of the March rate hike by 50 bp. Thus, the dollar index, taking into account the further increased demand for protective assets, can confidently consolidate above 95.50. Closing above last week's peak at 96.43 will open the way for further growth in the near term.
The growth of the dollar index will pull down the EUR/USD pair. If the situation in Ukraine does not take a radically decisive turn for the better, the quote risks to sink significantly this week. Judging by the scenario according to which events are developing, there is no need to wait for an improvement in the situation.
Encouraging data on the region's economy can act as a support for the euro. A fundamentally justified indicator in the current market realities is the mark of 1.1300 and below. The movement towards it will be justified, analysts say.
