Despite some higher safe-haven flows, markets remain quite reluctant to price in any sizeable geopolitical risk premium. Developments in Russia/Ukraine hold the key to this week's market moves, with a lack of de-escalation further supporting the JPY, CHF and USD. The latter should also be helped by lingering speculation about a 50bp Fed hike in March.

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USD: Geopolitics and 50bp hike speculation to help

Headlines about Russia-Ukraine geopolitical tensions have taken center stage again during the weekend. A phone call between US President Joe Biden and Russian President Vladimir Putin yielded no results in the direction of de-escalation, and the US warned Russia of “severe costs” in case of an invasion of Ukraine. While the Kremlin has continued to deny any intention to go further with military actions, multiple countries have been evacuating citizens from Ukraine.

This week is set to be a pivotal one to gauge how the geopolitical situation develops in Ukraine, with a lot of focus on German Chancellor Olaf Scholz’s meeting with Putin in Moscow tomorrow. For now, it looks like markets are holding on to a mostly sanguine stance, even though Friday’s price action showed a shift to defensive trades. In FX, the yen rose sharply on Friday, with the dollar also attracting some safe-haven flows. These two currencies – as well as the Swiss franc – should remain bid until (and if) we get indications that a diplomatic solution is in sight.

This morning’s Asian session seems to suggest that markets are adopting a wait-and-see approach on geopolitics at the start of the new week. It still appears there is not much risk premium related to Ukraine embedded into asset prices at the moment, and we, therefore, flag quite significant downside risks for exposed currencies - directly the rouble and indirectly all pro-cyclical currencies and especially the European ones - should tensions escalate further. One pair to keep an eye on is EUR/JPY, which could slip back to the pre-ECB sub-130 levels.

The other key thread to follow this week in markets is whether market pricing will continue to shift in favor of a 50bp rate Fed rate hike in March, which is currently about 50% priced in. Today, we’ll hear from Fed hawk James Bullard who recently hinted at some openness to a 50bp move, while Wednesday will see the release of the February FOMC minutes. The data calendar in the US is quieter this week, with only retail sales and industrial production numbers released on Wednesday.

While we doubt the Fed will deliver half-point increases, ongoing market speculation in that direction can offer some support to the dollar, and 96.00 could represent a floor for DXY this week.

EUR: Risks tilted to the downside

A break below 1.1400 in EUR/USD last week is likely signaling that the European Central Bank members’ recent attempt to cool down excessive hawkish speculation has eventually got to the euro. The common currency looks a bit more vulnerable at this stage, also due to its sensitivity to the Ukrainian situation. Another break lower – below 1.1300 – could generate some further bearish momentum in EUR/USD that could extend to the 1.1200-1.1250 area should markets scale back bets on summer tightening by the ECB.

This week, the eurozone calendar includes the ZEW index, the second print of 4Q GDP figures and consumer confidence data. A bigger focus, however, will be on ECB speakers: we’ll hear from President Christine Lagarde today, and from François  Villeroy, Pablo Hernández De Cos and Philip Lane later in the week.

GBP: Data to endorse BoE tightening expectations

Should markets move to price in more geopolitical risk, cable may well break below the 1.3500-1.3600 range that has held since the start of February.

At the same time, we think that this week’s data flow in the UK should continue to support Bank of England tightening expectations. The unemployment rate may have inched lower again in December, while a potential (and likely marginal) slowdown in inflation may be disregarded given the projected energy price increase later this year.

EUR/GBP may keep declining towards 0.8300.

SEK: Undervalued, but no recovery soon

EUR/SEK has risen to 10.60 levels, and we may have to wait until mid-2Q before seeing a decisive retrace to the 10.40 mark despite the pair being around 2% overvalued in the short term (according to our fair value model). That’s because the combination of a dovish Riksbank, negative exposure to US tech stock woes and geopolitical risk in Ukraine should all curb the krona's recovery.

This week is set to be quite busy data-wise in Sweden, with the Prospera inflation expectations survey on Thursday and the January CPI report on Friday. We doubt that higher-than-expected readings will generate much SEK strength given the recent clear indications from the Riksbank that a hawkish shift is still far off.

If EUR/SEK remains stuck around 10.60 with risks of a move to 10.70-10.80, USD/SEK could easily see a rise to the 9.48 January high, especially if tensions in Ukraine continue to build.