Global markets have been shaken by a sudden escalation in the Russia-Ukraine conflict after Ukraine used US-supplied long-range missiles for a strike in Russian territory and Moscow lowered the threshold for response using nuclear weapons. So far, this has translated to some noise in the FX market, but no big moves. We suspect the dynamics in US Dollar (USD) crosses were partly still affected by the USD’s overbought positioning status, which may have contributed to curbing geopolitics-related gains, ING’s FX analyst Francesco Pesole notes.

Less resistance to a fresh leg higher in the Greenback

“In other words, markets seem to be cautiously leaning towards a sanguine view on Ukraine, meaning any further escalations should have a much deeper impact on FX. European currencies (excluding CHF) are inevitably the most vulnerable, whereas high-beta currencies that are geographically far from the conflict (like CAD or AUD) should only be affected indirectly through risk-off. The oversold JPY probably has the highest upside potential from an escalation.”