Sterling edges higher versus euro ahead of ECB policy meeting

Sterling edged lower against the euro on Thursday as investors awaited the European Central Bank policy meeting outcome later in the day.

It was also weak versus the dollar after easing oil prices and the start of the first talks between Ukraine’s and Russia’s foreign ministers since the invasion failed to stop a rush into safe-haven currencies.

The meeting, which Turkish Foreign Minister Mevlut Cavusoglu brokered, started a few minutes ago.

Investors will closely watch ECB President Christine Lagarde’s news conference (1330 GMT) to see how the central bank balances the risk of higher inflation against weaker European economic growth caused by the war.

The pound fell against the euro recently after reaching its highest level since June 2016 on Monday due to diverging policy expectations from the Bank of England and ECB.

Euro zone money markets have been increasing their bets on ECB’s monetary policy tightening in the last three sessions after scaling them back sharply right after the Russian invasion of Ukraine on Feb. 24. They are currently pricing in around 35 basis points (bps) of ECB rate hikes before year-end, not far from the levels seen before the Russian attack.

“The euro is starting to build a positive risk premium to the Ukraine conflict, as policy divergence (among other factors) still argues in favour of a weaker EUR/GBP,” ING said.

Analysts said the euro zone’s higher exposure to the Ukraine conflict compared to the UK supported the pound recently.

The British pound fell 0.1% against the euro to 84.02 pence on Thursday; it hit its highest level since June 2016 at 82.035 on March 7.

Further strength in sterling above $1.32 “may well be challenged by investors’ reluctance to let go of all their defensive US dollar positions,” ING analysts added.

The pound fell 0.25% to $1.3155, within striking distance of its lowest level since November 2020 of $1.3083 it hit on Tuesday.

The war in Ukraine and the ECB policy meeting have been overshadowing UK public borrowing issues.

British finance minister Rishi Sunak must decide whether to borrow heavily again or let public sector workers and households suffer a big income hit due to the recent surge in inflation, a think tank said.