Baby, is a wild world

Geopolitical risk has been the theme of the week, triggered late Thursday with a civil Malaysian plane downed by a missile in the border between Russia and Ukraine, and Israel invading Gaza, starting a ground offensive after Hamas rejected a truce. 

Market has temporarily forgot about Portugal bank woes, with the Espirito Santo group possibility of default hanging like a Damocles’ sword above the EU banking system, but seems also ignoring the consequences of the Russia/Ukraine conflict: so far sanctions had been tougher from the US, that effectively closed medium- and long-term dollar funding to banks, energy companies, and defense firms. 

The EU has also agreed to blacklist Russian companies and halt lending for investment projects in Russia, but is not that easy for Europe with many regional economies opposing further sanctions against Russia. Many of these European countries have energy deals with Moscow or are dependent on Russia for their gas. So while western countries pressure authorities to impose tougher sanctions, the EU has to politically maneuver to avoid harming the internal stability.  And that’s exactly the main EUR weakness: the clear lack of unity among member countries, the constant struggle about decisions that show the union is more a title than a fact. How much can you trust in the strength of the currency, when they can’t seem to agree on things like this?

Anyway, if the conflict continues escalating and Europe wants to remain a trustworthy state in the eyes of the rest of the world, they’ll have to act somehow, and deal at least with the drop in energy provision, something that can harm the common currency next week, considering the EU Foreign Ministers will discuss downed plane at Tuesday meeting.  This can become the key macro event of the week. 

As for the rest of the world, US inflation on Tuesday will be amongst the most watched and if ticks higher monthly basis, could give the greenback a boost.

In the UK BoE Minutes on Wednesday can be critical for latest Pound strength: albeit no change is expected, if only one member dissented from keeping rates steady, the UK currency will likely soar to fresh highs. GDP readings on Friday are expected to show a small improvement, also another buying -Pound trigger if the number overcomes expectations.  

Finally, macro traders will be watching European PMI readings on Thursday, numbers that had outstand for their weakness for most of the year: if the negative trend continues, expect EUR to remain under pressure.