Markets start the new week in risk-off mode as the Russia-Ukraine war escalates further, following Russia’s attack on Thursday morning. Moreover, the massive and far-reaching sanctions the west has now imposed on Russia are more impactful to markets than the war itself. There is not just a war in Ukraine, but also an economic war between the West and Russia. The Russian ruble is in free fall today because of the additional sanctions imposed over the weekend.

Despite this week’s calendar being a very busy one, expect economic reports and other events to take secondary importance to the events in Ukraine and the war there. This includes the Nonfarm payrolls and ISM manufacturing and services reports, which would typically be the main focus for Fx traders. Most of the US data this week is expected to print solid numbers and perhaps beat expectations. However, given the speed with which events in Ukraine are unfolding, any economic report may soon become obsolete, hence markets care less about data.

This leaves Fed Chair Jerome Powell’s testimony before Congress on Thursday as potentially the most important event on the calendar (of those that are scheduled). He will certainly be asked about the impact of the war and the economic sanctions on Russia, and the potential Fed’s response, should one be needed. In particular, markets are now on edge for possible USD liquidity issues, given that massive amounts of Russian USD assets are now frozen and have basically disappeared from global markets overnight. Given the global reserve status of the US dollar, the risk in this scenario is an abrupt and steep strengthening of the USD. If USD liquidity stress starts to appear, the Fed may need to ramp up the supply of dollars, similarly as it did during the March 2020 Covid outbreak when markets scrambled for dollars.

As for trading the market, Fx traders are now supposed to turn into geopolitical and war analysts. This is not an environment where one can comfortably expect to have an edge based on traditional trading strategies and methods. The markets will likely remain volatile, potentially with episodes of sharp bi-directional price gyrations (we already saw this last Thursday). Thus, it’s rather better to keep trading light and reduce risk by keeping position sizing smaller than in normal times.

The EUR is the most hit major currency from the war in Ukraine due to the close links with the region and with Russia, particularly for oil and gas imports. EURUSD opened almost 150 pips lower than the Friday close, although the market is now moving to close that gap. However, the retracement is not driven by any good news or improvement in the situation on the ground in Ukraine. So, this move could be just a technical correction that is short-lived. On this note, the EURCHF pair opened down 100 pips from Friday and is now trading even lower.

The EUR’s weakness is likely to persist this week as the market digests the impact of the sanctions, which will be harmful for the Eurozone’s economic growth. Moreover, both Russia and the EU consider targeting Europe’s gas imports. So far, the gas from Russia to Europe is flowing as usual, which is why we are not seeing huge moves in these energy commodities yet. However, the EU could decide to reduce or completely stop importing oil and gas from Russia. By the same token, Russia could itself decide to cut the flow of gas (although it would be very hurtful for the domestic economy) in retaliation to the economic sanctions.

In any case, even higher oil and gas prices would add to the pain for the already slowing EU economy. It will be hard to find a positive that can offer support to the EUR currency this week, except maybe for a “miracle solution” that would bring a quick ceasefire in Ukraine. Let’s hope one can be found and that peace will come to Ukraine soon.

The calendar features the preliminary (flash) CPI inflation report on Wednesday, but it’s unlikely to matter much in the current environment.