LONDON: Sterling rose against a weakening euro on Wednesday, with investors focusing on market bets on UK and euro zone rate hikes amid concerns about the economic impact of the war in Ukraine.
The pound edged higher also versus a rising dollar while investors continued to rush into safe-haven assets.
The European Union said on Wednesday it was excluding seven Russian banks from the SWIFT messaging system, but stopped short of including those handling energy payments, in the latest sanctions imposed on Russia.
Russia can still send oil and gas to Britain despite a ban on the country’s ships visiting British ports, the Department for Transport (DfT) said.
The repricing lower of the UK tightening cycle “should leave GBP a little vulnerable, as should its status as a currency that is more sensitive to financial risks/equities, given the size of the financial sector in the UK economy,” ING analysts said.
Money markets are currently pricing in 115 basis points (bps) of UK rate hikes this year compared with about 130 bps before the Russian invasion, while discounting 25 bps of rate hikes from the European Central bank by December 2022, from around 35 bps.
“With European equities remaining vulnerable as the world reprices European growth, EUR/GBP can bounce around in a 0.8300-0.8400 range - but could break higher if equities take another large leg lower,” they added.
News of the Ukraine conflict has dampened risk sentiment with stocks staging some small gains on Wednesday but investors remained cautious as Russia showed no signs of stopping its offensive. According to Commerzbank analysts, forex traders “are slowly beginning to realise” that the European economy will be much more heavily affected by the war in Ukraine and that the inflationary effects might damage the euro much more than other G10 currencies.
“Simply due to the fact that Europe depends more heavily on Russian energy supplies than other economic areas,” they added.
Sterling rose 0.4% against the single currency to 83.15 pence. The pound was up 0.1% against the dollar to $1.3341.
Investors were focused on comments from the Bank of England (BoE), with Deputy Governor for Financial Stability Jon Cunliffe due to give a speech at 2000 GMT.
BoE policymaker Michael Saunders said on Tuesday that Russia’s invasion was likely to push Britain’s soaring inflation rate higher, but it was too soon to determine the impact on monetary policy.