Pound Euro (GBP/EUR) Exchange Rate Steady amid Russian Invasion of Ukraine
The Pound Euro (GBP/EUR) exchange rate is trading slightly higher on the day’s opening levels on Thursday after initially spiking on news Russia launched an invasion of Ukraine.
Russia sending its military across the Ukraine border sparked a market flight to safe-haven assets and weighed heavily on the Euro, which left GBP/EUR trading around €1.20 at the time of writing.
Euro (EUR) Slides as Russian Military Action Drives Uncertainty
Russia’s invasion of Ukraine is stoking significant volatility in the Euro (EUR) on Thursday morning.
Market concerns over the impact of a war in Europe are weighing heavily on EUR sentiment due to uncertainty and the threat of significant disruption to trade and economic activity in the Eurozone.
Natural gas prices surged by around 40% on Thursday morning and fuelled concerns over inflation pushing higher in the Eurozone, which could in turn weaken economic growth.
As Russia supplies around 35% of natural gas to Europe, disruption and higher cost of supply will likely disrupt economic activity.
Concerns over the impact of European banks’ exposure to Russia also dented EUR sentiment, although many major banks have reduced their presence in Russia in recent years.
Pressure on EUR exchange rates is also coming from the prospect of a war in Europe threatening to derail economic recovery from the coronavirus pandemic, and increased uncertainty over the European Central Bank’s (ECB) monetary policy stance.
Markets had begun anticipating tightening monetary policy through 2022, but Russia’s invasion of Ukraine looks to have complicated the ECB’s path to ending its bond-buying programme and raising interest rates.
Comments from ECB policymaker Yannis Stournaras yesterday saying that the central bank should maintain its bond-buying programme until at least the end of 2022 to counter the fallout from the Ukraine conflict already fuelled uncertainty.
Pound (GBP) Dented by Shifting BoE Policy Expectations
The Pound (GBP) weakened during Thursday’s European session but gained against the Euro amid heightened market volatility driven by Russia’s invasion of Ukraine.
The conflict has prompted uncertainty over the UK’s economic growth outlook and expectations for the Bank of England’s (BoE) monetary policy tightening this year.
Cautious comments from BoE policymakers yesterday continue to weigh on Sterling sentiment.
Speaking to the House of Commons Treasury Select Committee, Governor Andrew Bailey warned inflation will likely overshoot the BoE’s forecast of inflation peaking above 7.25% around April.
Amid surging energy prices, Bailey also warned of the risk of higher wages and businesses passing on costs to consumers.
He said:
“It’s not just wage setting, it’s also price setting, it’s both.
“There is very clearly an upside risk there. The upside risk comes through from the second-round effects.”
Bailey also cautioned markets should temper expectations over the scale of interest rate rises, and rising inflation and a wage-price spiral would hit the worst off in the UK the most.
Meanwhile, Deputy Governor Ben Broadbent said ‘This is the most challenging period for monetary policy since inflation targeting began in 1992.’
In light of Russia’s invasion of Ukraine and likely further building of inflationary pressure, uncertainty increased over the BoE’s monetary policy outlook.
Pound Euro Forecast: Ukraine Crisis to Dominate GBP/EUR Movement
Developments in Russia’s invasion of Ukraine will dominate Pound Euro exchange rate movement in the coming days. Investors will likely continue seeking safe-haven assets as the conflict unfolds.
The uncertainty and the threat to Eurozone and UK economic growth will likely continue stoking volatility in GBP/EUR.
At the same time, expectations will likely shift over the BoE and ECB’s plans for monetary policy, as economic growth may slow and inflationary pressures build again.
The outcome from the ECB’s meeting in Paris today may drive additional movement in EUR exchange rates, as policymakers discuss their response to the developments in Ukraine ahead of its next policy meeting in March.
Comments from BoE Governor Andrew Bailey this afternoon may also drive GBP movement, as investors look for the central bank’s response to the Ukraine crisis.