LONDON (Reuters) – The British pound fell to its weakest level against the euro in over three months on Wednesday but rose against the U.S. dollar amid hopes of progress in Russia-Ukraine peace talks.
Russia on Tuesday promised to scale back its military operations near the Ukrainian cities of Kyiv and Chernihiv and Ukraine proposed a neutral status with international security guarantees while maintaining its territory.
“European FX, notably the euro and GBP have benefitted from an unwind of Russian risks,” said Justin McQueen, a strategist at DailyFX.
“However, given that we have seen significant cross-EUR/GBP buying, aided by narrowing rate differentials, the upside in the Pound has been modest at best,” McQueen added.
Sterling was up 0.2% against the U.S. dollar to $1.3127.
Against a strengthening euro, the pound was down 0.1% after earlier falling to its weakest against the single currency since Dec. 23.
Meanwhile, data from the British Retail Consortium showed major retailers raised their prices by 2.1% in March, the fastest annual increase since September 2011 and the fifth consecutive month of increases.
The data signals price pressures are continuing, handing the Bank of England a dilemma as a cost of living squeeze adds to growth risks.
The BoE has signalled it could be prepared to pause its tightening cycle after the next meeting, according to Michael Brown, head of market intelligence at Caxton.
However, markets are pricing in a further 133 basis points of tightening by the end of the year, taking the bank rate above 2.0%.
“There’s a clear divergence here, which leaves the pound vulnerable to downside were hikes to be priced out,” Brown said.
(Reporting by Samuel Indyk; editing by Barbara Lewis)
