The Russia-Ukraine war on its outbreak created major volatility in Forex markets but recently this conflict has been ignored by financial markets. We are now at a critical stage of the war and could see an escalation that in our view, will have a major impact on the Forex markets. The impact of the war if it escalates will hurt European currencies and one in particular is vulnerable USD/PLN which is at the end of this article with levels to watch.

Please Note: All wars are a tragedy and we are not writing about who is right or wrong in the conflict - we are just trying to present the facts of the war which the mainstream media don't. The Western media present a picture of a Ukranian victory is coming it will just take time but at present a Ukraine victory looks highly unlikely...Before we look at USD/PLN we need to look at the background of the conflict and why it's so significant for the Polish Zloty.

The Situation Now

Ukraine is mounting an assault against around 750,000 Russian troops who are well-trained, motivated, and have prepared fortifications. Ukraine has around 250,000 men who are now mostly conscripts with the exception of 30 – 50,000 who were trained by Nato. The Ukrainians are motivated, and have fought bravely but lack troop numbers resources, and equipment to win against Russia. Independent sources note that 50% + of NATO-trained troops have already been killed or seriously injured already in the latest counter-offensive and estimate that 30% - 50% + of Ukraine's NATO-supplied equipment has been destroyed.

Russia not only has an advantage in terms of manpower but also has an advantage in numbers of artillery, tanks, and heavy weapons – Russia also crucially has air superiority. NO offensive is likely to be successful without control of the skies.

In addition, Russia is on a war footing and can produce substantial amounts of equipment but Ukraine relies on the West which sends minor amounts in small batches. The problem is the West is now running out of equipment and munitions to donate. The running out of munitions can be seen by the US resorting to sending cluster munitions because they have no other ammunition in sufficient numbers to send and neither do other members of NATO.

How is the offensive going?

Ukraine in its counter-offensive is looking to capture territory which Russia has occupied which is of similar size to Portugal but so far, Ukraine has managed to re-capture around 80 square kilometers which is smaller than Portugal's capital Lisbon. In all areas attacked, the Ukrainian forces have not been able to take out and hold even the first line of defense and the Russian Forces have three lines. The Ukrainian counter-offensive has obviously failed but reading Western media you would never think this - There are media outlets seriously saying Ukraine has the military capacity to move forward and take Crimea.

Ukraine has suffered major casualties in the war so far, independent reports estimate the total losses of Ukraine in the war at around 350,000 dead, with another 650,000 seriously injured. While Russia has taken losses, there estimated at far less than Ukraine, Russia is estimated to have a 7:1 advantage in terms of kill rate so while it has suffered serious losses Ukraine has suffered far more 

The West vetoed a peace deal between the two sides which Ukrainian President Zelensky was willing to sign BUT UK Prime Minister Boris Johnson on behalf of NATO persuaded Ukraine not to negotiate with Russia at all. Johnson and the West in return promised massive support for Ukraine going forward which has not been forthcoming to the degree that Ukraine thought they would get which has seen Ukraine President Zelensky vent his frustration at NATO at the recent Vilnius summit.

So What Happens Now? NO Peace Talks Likely 

Russian peace terms are they keep the land they have which is mostly ethnic Russian, Ukraine passes anti-Nazi laws and Ukraine is neutral going forward, it can join the EU but NOT NATO. On the other side, Ukraine and the West, want Russia to withdraw from Ukrainian territory taken since the invasion but also to give Crimea Back. Russia has already said the Ukranian and the West terms are unacceptable and any existential threat to the Russian state will be met with Nuclear weapons.

Russian President Putin is under pressure to finish the war and this was seen recently in the Wagner PMC mutiny which was against the military leadership being too soft not to overthrow Putin. The view of the military being too soft is the general view of the Russian public. While the public overwhelmingly supports Putin they want an aggressive offense to end the war rather than the current war of attrition.

If a  major offensive is started by Russia with the intention of finishing the war they will probably move west closer or to the Dneiper River and also move to capture Odessa. If this happens what will NATO do? They are unlikely to get involved directly but members could independently and two are seriously considering the idea.

The Wildcard Poland

Poland and also Lithuania have muted the idea of committing troops independent of NATO to go into Western Ukraine with the idea that Russia will stop when they do so. Also, both countries have a strong connection with Western Ukraine having ruled the area back in the 16th - 17th centuries. Russia would probably treat a move like this as a Trojan horse for Nato and there would be a high risk of direct confrontation.

Even if there is no direct confrontation Poland will probably absorb more refugees who are already straining the economy and social services – the PLN is in our view going down even if a peace deal is made (which we think is unlikely) due to the fact, it's export-led and highly sensitive to EU and the global economy. The EU is heading for recession and the global economy is slowing. Poland will cut interest rates going forward so the USD will rise as yields narrow and the economy will struggle to avoid recession. Poland getting involved directly in the Ukraine conflict will see the USD make a massive move to the upside.

Technical Analysis 

The key levels of support and resistance in our view in terms of both the monthly and daily charts of USD/PLN are below.