(Reuters) – Sterling edged higher against the euro on Wednesday, with investors focusing on market bets about UK and euro zone rate hikes amid concerns about the economic impact of the war in Ukraine.
The pound lost ground versus a rising dollar as investors continued to rush into safe-haven assets.
News about the conflict dampened risk sentiment after U.S. President Joe Biden warned Vladimir Putin that the Russian leader “has no idea what’s coming.” Meanwhile, invading forces bombarded Ukrainian cities and appeared poised to advance on the capital Kyiv.
Money markets are currently pricing in 108 basis points (bps) of UK rate hikes this year from around 130 bps before the Russian invasion, while discounting just about 20 bps rate hikes from the European Central bank by December 2022. [IRPR]
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.
“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.
Sterling edged 0.1% higher against the single currency to 83.40 pence.
Investors are also 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.
The pound was down 0.2% against the dollar to $1.3293. BoE policymaker Michael Saunders said on Tuesday that Russia’s invasion of Ukraine is likely to push Britain’s soaring inflation higher, but it is too soon to determine the impact on monetary policy.
The BoE needs to ensure the current surge in energy prices does not feed into businesses’ longer-term pricing decisions, Monetary Policy Committee member Catherine Mann added on Tuesday.
(Reporting by Stefano Rebaudo Editing by Mark Potter)
