The US president has once again missed out on the Nobel Peace Prize, but he’s not giving up on winning it just yet. And with Iran showing little willingness to compromise, attention has now shifted to Ukraine, with Trump claiming that Russia and Ukraine had agreed to an energy truce.
The problem is, we’ve heard this before, and so far, it’s gone no further than words. Overnight on October 12, Russian strikes hit a thermal power plant west of Kharkiv, gas production facilities in the Kharkiv region, and an oil depot in Sarny, Rivne region.
The US and Europe’s new peace deal for Ukraine could face a similar fate.
Among other things, the plan reportedly includes Russia agreeing to a ceasefire along the current front line while keeping control of the territories it holds. It also covers an economic deal, a Russia-Europe security agreement, Ukraine’s reconstruction, support for the families of killed and wounded soldiers, and US and European security guarantees for Ukraine similar to NATO’s Article 5. Another proposal is to link Russia, Ukraine, and Europe through an energy deal.
But the key issue of territory remains unresolved. A “territorial compromise that neither side will like” is reportedly being considered, with support measures thrown in to sweeten the deal. Still, with so much at stake for both sides, a deal remains difficult.
Peace also looks no closer after the EU approved its 22nd package of sanctions against Russia, adding around 1,600 individuals and entities to its sanctions lists, including companies in the automotive, shipbuilding, and metals industries - the biggest expansion of the sanctions lists since the conflict began.
It’s also worth keeping in mind that if Democrats take control of Congress in the midterm elections, Washington’s rhetoric on ending the conflict in Ukraine could harden once again, potentially moving the dollar index.
What if the war drags on?
For Europe, a prolonged conflict means high energy prices and rising defense spending, putting further pressure on government budgets. This could push investors to demand a higher risk premium, adding pressure on bond markets. While equity markets aren’t too concerned for now, that could change if bond yields keep rising and money starts flowing out of riskier assets. These compounding pressures leave EUR/USD vulnerable to further downside.
For the rest of the world, inflation remains the main risk, especially through energy prices, potentially forcing central banks to maintain a hawkish stance.