Eurozone inflation is awaited amid diplomatic developments on the Ukraine crisis

After the Reserve Bank of New Zealand (RBNZ) raised rates earlier on Wednesday, investors eagerly await inflation reports from the UK and Eurozone CPI data, while considering Russia's troop movements near Ukraine and Western sanctions as allowing room for avoiding a war, which is expected to slow European markets' decline on Wednesday. Commodity prices remain elevated. However, traders are still nervous about the situation on Europe's eastern edge.

Currency markets

After a choppy few sessions, currency markets took a breather on Wednesday as markets looked to gain a handle on the latest developments of geopolitical tension.

Market sentiment has improved, and US Treasury yields have pulled back in recent days, keeping EUR/USD above 1.1300. As a result of an encouraging diplomatic expectations in the Ukraine crisis, risk sentiment has been leaning positive. Eurozone inflation, awaited. 

Considering the hawkish policy action from the Reserve Bank of New Zealand, Kiwi is expected to extend its upside leg against the dollar towards the 0.68 mark after finding support from the lower line of the falling channel.

 As a result of Russia's latest moves in Ukraine, the commodity-sensitive Australian dollar was also on the rise.  

RBNZ extends its hawkish tone beyond rate hikes

The Reserve Bank of New Zealand (RBNZ) raised rates 25 basis points to 1.0% but came close to moving by 50 basis points to stem inflation expectations. It also revised up its projected path for the official cash rate (OCR) to peak at 3.35% from 2.6% previously and well above market expectations. An aggressive sale of the government's bond holdings, though a relatively modest NZ$5 billion a year, added to the hawkish tone.

A major surprise was the level of rising in projected OCR - higher even than the top-of-the-market forecast of 3%. The markets now expect rates to reach 2.5% by year-end, up from 2.25% previously, while two-year swap rates climbed 12 basis points to 2.695%, reaching the highest levels in six years.

Eurozone final inflation reading

On Wednesday, attention will also be focused on the final Eurozone consumer price index for January, which is expected to confirm the pressure on the ECB to act to curb inflationary pressures. YOY Inflation is widely seen to remain as high as 5.1%. At the same time, the monthly figures are forecast to ease by 0.1% to 0.3%. ECB's De Guindos will deliver a speech afterwards. The question for investors is whether or not the political tensions will affect the EU's economic prospects.