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The pound rose on Wednesday following encouraging news on the peace talks between Ukraine and Russia. Economists at Scotiabank expect a hawkish Fed and a cautious BoE to push the pound against the US dollar lower.

While the Fed is expected to hike by 25bp today and signal 90bp of further tightening this year, the move is fully priced in by markets and the main driver for today will be the optimism surrounding the peace talks today. There are no data releases in the UK calendar today and the pound will continue to find support from market optimism around a possible de-escalation in Ukraine. Investors are also perhaps a bit cautious ahead of tomorrow’s Bank of England meeting, where a rate hike and more positive comments could help the pound rise. If there are no surprises from the Fed today, then the GBP/USD should be able to hold on its gains.

The positive market sentiment has also pushed European stock markets higher, with the FTSE 100 index in London up 1% at 7,249 and the Germany, French and Italian exchanges 3% ahead. The pan-European Stoxx 600 index rose 2.6%.

Russia – Ukraine peace talks

Ukraine’s president Volodymyr Zelenskiy said the talks were “more realistic” while Russian foreign minister Sergei Lavrov said there was “some hope for compromise,” with Russia demanding a neutral status for Ukraine.

Since the 24th of February when the invasion began, Russian troops have failed to seize any of Ukraine’s biggest cities, while they have aggressively bombed and destroyed smaller towns and cities.

What does Russia demand?

One of the central questions is what President Vladimir Putin wants, as many have claimed that he seeks to restore Russia’s sphere of influence over older Soviet territories like Ukraine, and to stop their links to the West. Putin also seems to want to overthrow Ukraine’s pro-Western government and install a pro-Russian puppet leadership, so Ukraine is under Russia’s influence.

In terms of the talks, Russia wants legal guarantees that Ukraine will never be allowed to NATO and wants Ukraine to sign a neutrality agreement and change its constitution to solidify this reality.

Moscow has demanded that Ukraine recognise the independence of pro-Russian republics of Donetsk and Lugansk. It has also demanded that Ukraine recognises Crimea, which it annexed in 2014, as Russian territory. And it has called on Ukraine to cease all military activity.

In a televised speech to government ministers on Wednesday, Putin referred to the pain that Western sanctions have inflicted on the economy but insisted that Russia could tolerate the blow. Trying to justify the war in Ukraine, he claimed that there were concerns that: “In the foreseeable future, it was possible that the pro-Nazi regime in Kyiv could have got its hands on weapons of mass destruction, and its target, of course, would have been Russia.” He said: Western countries wanted to turn Russia into a “weak dependent country; violate its territorial integrity; to dismember Russia in a way that suits them”.

He clarified that he was willing to discuss “the neutral status of Ukraine, its demilitarisation, and its ‘denazification’”.

What does Ukraine want out of the talks?

President Zelenskyy said on Monday that Ukraine wants a “fair peace” with Russia, but his country won’t surrender, or accept ultimatums from Russia. Ukraine has demanded a ceasefire with Russia but it won’t surrender any of its territory to Russia. Ukraine may be willing to forego NATO if there are “security guarantees” from the US and NATO about its safety.

An immediate concern for Ukraine has been the creation of humanitarian corridors to allow the safe evacuation of civilians. Mariupol, for example, is surrounded by Russian forces and has been bombarded with civilians struggling to survive with limited food, water and power. Ukraine has said that has send a convoy with humanitarian supplies to the port city on Tuesday and hopes to evacuate women and children as it returns, according to Reuters. More than 2,500 civilians have been killed in Mariupol since the war started, according to a Ukrainian official cited by Reuters.