The trade has been to ignore Ukraine until the bullets started flying, well on Tuesday they began to fly and it caused a bout of risk aversion. The US dollar was the top performer while the yen lagged. Chinese GDP is a major risk in the hours ahead.

Tuesday was a busy day in markets. The initial focus was on US CPI (slightly high) and the Empire Fed (soft) but quickly shifted to Ukraine. On the weekend, pro-Russia separatists captured about a dozen government buildings in Eastern Ukraine. The government pledged a military response and delivered it by retaking an airfield.

Reports suggested 11 men were killed in the operation and a Ukrainian general said it was only the first step. Putin responded that the crisis had been “sharply escalated” and said the actions were unconstitutional.

The yen rallied as the headlines tricked out, sending USD/JPY down to 101.50 and EUR/JPY to a one-week low.

A turnaround began when Nikkei reported that Japan's government will downgrade its economic assessment on Thursday for the first time since 2012. The move could be the first step towards further easing.

USD/JPY rebounded back to 101.90 and it was assisted by a turnaround in US stocks. The Nasdaq touched the lowest since November but reversed to close slightly higher.

The Australian dollar was soft as commodities slumped. The World Gold Council reported on gold stockpiling for the shadow banking system in China and that sparked a quick $40 drop in gold. The government cracked down on similar stockpiling in copper last year, leading to a persistent selloff.

The focus will remain on AUD in the hours ahead with China set to report on industrial production, retail sales and Q1 GDP – all at 0200 GMT. The consensus is for 1.5% q/q growth, which is a modest 6% annualized pace. The collapse in trade numbers at the start of the month could be a negative but the trade balance was strong and that may add an upward bias. Any miss will immediately hit the Australian dollar and it could prove to be a lasting move. 

The limp US dollar reaction to the upbeat retail sales report highlights the divergence between market and economist expectations. On Monday, the Australian dollar was the top performer while the euro lagged. The RBA minutes are the highlight in Asia-Pacific trading.

Headline retail sales rose 1.1% in March, the best month since Sept 2012 and beating the 0.9% consensus. The previous month was also revised to +0.7% compared to +0.3% originally reported. The market more closely watches the control group and it painted a similar picture up 0.8% compared to 0.5% expected. There weren't any caveats in the report but the dollar couldn't take advantage, rising 15-20 pips and then fading. USD/JPY rose above 102.00 then slipped back to 101.70. EUR/USD and cable fell to session lows but wouldn't go any further.

If the dollar can't rally on good news, especially as it comes off a rough week, it's tough to envision a push higher. A key spot to watch is bonds. The 10-year Treasury chart is similar to USD/JPY and a break below 2.57% from the current 2.63% is an inflection point to watch.

The largest move on the day was in the euro but it was largely on the open. The catalyst was jawboning from Draghi but strong words are no replacement for action and the market doubts his sincerity, at least in the near term.

The focus switches to the Australian dollar lately with the minutes of the April RBA meeting due at 0130 GMT. The minutes could highlight the more-optimistic shift from Stevens & Co. Comments about investment and housing inflation could grab headlines and fuel AUD gains.

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This week's release of UK inflation and unemployment data may finally reveal that wages are above the standard of living for the first time in almost 5 years. What it means for sterling in charts & complete analysis.

Jawboning from Draghi and tensions in Eastern Ukraine are the main focuses of the new week. The euro is down a half-cent in early trading with the dollar slightly stronger across the board. UK house price data is an early indicator to watch. 

Draghi made a strong attempt to talk down the euro on the weekend and so far it's working. The euro rallied to 1.3886 from 1.3705 last week despite mild hints of unhappiness from the ECB. Draghi stepped up the rhetoric on the weekend, saying “The strengthening of the exchange rate would … require further monetary policy accommodation.”

Trading is thin early in the week but the euro is about a half-cent lower at 1.3842.

Other market pressure could come from Ukraine where bullets flied on the weekend and pro-Russia militias captured police and state security headquarters in Slaviansk. A small number of men were injured or killed on both sides and Ukraine's president said he will launch a military counterattack against the militias unless they lay down their arms on Monday.

If the threat proves true it will mark an escalation in the conflict and raise fresh questions about a Russian invasion. It would also be a good reason for the 'risk off' tone from last week to extend.

Commitments of Traders

Speculative net futures trader positions as of the close on Tuesday. Net short denoted by - long by +.

• EUR +23 vs +33K prior
• JPY -87K vs -88K prior
• GBP +46K vs +34K prior
• AUD +3K vs -4K prior
• CAD -34K vs -37K prior
• CHF +11K vs +14K prior
• NZD +20K vs +18K prior

The net Australian dollar climbed into positive territory for the first time since May. Some euro bulls cleared out just as EUR/USD began to rally. Cable positioning is getting a bit crowded.