LONDON: The euro fell to its lowest level against the British pound since 2016 as traders weighed the impact of Russia’s invasion of Ukraine on global monetary policy.
The Bank of England remains likely to hike its interest rate for a third consecutive meeting this month but expectations of a rate hike from the European Central Bank by the end of the year have declined since Russia invaded Ukraine a week ago.
“Market expectations about the potential for rate hikes from both the BoE and the ECB this year have been pared back since the Russian invasion of Ukraine,” Rabobank FX strategist Jane Foley said.
“However, while the market still anticipates that the BoE could follow through with a third consecutive rate hike at its March meeting, the doves maintain the upper hand at the ECB,” Foley added.
ECB Governing Council member Mario Centeno warned on Wednesday that Russia’s invasion of Ukraine could lead to stagflation in Europe.
The euro fell to its lowest level versus the pound since July 2016 at 82.76 pence at the start of London trade before trimming some losses.
ING’s Global Head of Markets Chris Turner said sterling might also be being supported as Britain-based energy companies look to cut their exposure to Russia.
“It will also be hard to know, but some GBP buying/hedging relating to the divesting of Russian assets in the oil and gas sector may be helping GBP too,” Turner said.
BP said this week it would exit its stake in Russian state-controlled energy firm Rosneft, while Shell said it intended to exit its partnerships with entities of Russian gas company Gazprom.
Elsewhere, Britain’s services sector expanded at its fastest pace since June, according to the final IHS Markit/CIPS services Purchasing Managers Index.
Sterling was down 0.5% against the dollar at $1.3337 as the dollar was supported by comments from Federal Reserve Chair Jerome Powell in which he reiterated that it would be appropriate to proceed with interest rate hikes through the course of the year.