EUR/USD rallies on hopes Ukraine crisis won’t escalate further

Currency markets were infused with some notable volatility on Tuesday, amidst the fallout from Russia’s decision to send troops in to separatist-held regions of Ukraine.

Meanwhile, the pound is trading in a narrow range so far this morning with GBP/EUR stable at €1.2001 and GBP/USD flat at $1.3611. GBP/CAD and GBP/AUD are holding steady at C$1.7326 and AU$1.8784, respectively, while GBP/NZD has accelerated to NZ$2.0060.

As the Ukraine crisis continues to dominate headlines, could the currency market be infused with fresh volatility today?

What’s been happening?

After opening the session at a three-week low against the US dollar as Russian ‘peacekeeping’ troops entered Ukraine, the euro was able to mount a convincing recovery yesterday as markets appeared hopeful things wouldn’t escalate into a full-blown invasion.

Also supportive of EUR exchange rates was the publication of Germany’s IFO business climate index, which printed at a five-month high in February, following a stronger-than-expected improvement in business morale.

At the same time, the US dollar fluctuated on Tuesday, with the safe-haven currency’s initial gains quickly being reversed as a bullish market mood prevailed.

The ‘greenback’ remained on the defensive through the afternoon, in spite of the latest US PMI figures printing above expectations in February.

Finally, the pound spent much of yesterday’s session on the defensive, following some mixed messages from Bank of England (BoE) policymaker Dave Ramsden.

While Ramsden suggested there might need to be some further monetary tightening in the ‘near-term’ he was a little more cautious in his longer-term outlook as he warned the situation in Ukraine will make it difficult to predict future policy.

What’s coming up?

Looking ahead, it seems safe to assume currency markets will remain sensitive to Russia-Ukraine developments going forward.

Any escalation in tensions may benefit the safe-haven US dollar, with the US currency likely to struggle to find any other stimuli in the absence of any notable USD data releases today.

Elsewhere the publication of the Eurozone’s latest CPI release could bolster EUR exchange rates this morning if January’s finalised figures confirm inflation in the bloc climbed to a new record high.

Meanwhile the focus for GBP investors will be on a speech from BoE policymaker Silvana Tenreyro. Could some hawkish comments help to underpin the pound?