Pound Euro Exchange Rate Reverses Gains on Decisive EU Action
(Updated 17:00, 25/02/2022) Reversing its earlier losses, the Euro (EUR) climbed against the Pound (GBP) this afternoon as European officials prepared to respond to the Ukrainian Prime Minister Zelenskiy’s latest appeal for help.
Germany’s finance minister, Christian Lindner, announced that the country was ‘open to cutting Russia out of the SWIFT international payments system’, as the Financial Times confirmed that EU foreign ministers were planning to approve a new round of sanctions by the end of the afternoon.
The accompanying strength in the Euro followed days of uneven trading between GBP and EUR – the result of uncertainty over whether recent developments bode well or poorly for the rival currencies. Strong risk aversion appeared to lend support to the comparatively risk-off Euro; but EU vulnerability to disruptions in Russian energy exports put pressure on the single currency.
Nevertheless, EUR upside prevailed today as Pound investors turned bearish on fading optimism regarding the Bank of England (BoE)’s rate hike outlook. BoE policymakers have sounded more dovish recently, as political uncertainty dampens GDP growth prospects and the prospect for long-term tightening.
Original article continues below:
GBP/EUR Exchange Rate Trends Up on Calmer Market Mood
The Pound Euro (GBP/EUR) exchange rate is climbing this morning as risk-on currencies regain some strength, despite ongoing conflict in Ukraine.
At the time of writing, GBP/EUR is trading at €1.1972, up 0.2% from today’s opening levels.
Pound (GBP) Finds Some Support, Hangs Around Weekly Lows
The Pound (GBP) has ceased falling against its peers, for now, as market sentiment settles despite fighting in Ukraine. Officials in the country expect an attack on the capital city of Kyiv later today – explosions and gunfire have already been heard in the Obolonsky area.
Stock markets have calmed as investors digest the effects of the fraught political situation, but commodities continue to climb. Risk aversion is limiting significant gains for Sterling as negotiations continue amongst Europe and its allies to decide whether additional sanctions need to be imposed on Russia.
The UK has frozen assets and imposed a travel ban on eight named individuals and 11 Russian businesses, including six banks – but Ukrainian officials are angry that European leaders have held back from imposing the potentially most damaging sanction. They are calling upon Western powers to block Russia from an international payment system through which it receives foreign currency.
According to France’s Finance Minister Bruno Le Maire, cutting Russia off from SWIFT (the Society for Worldwide Interbank Financial Telecommunication) remains on the table, but as a last resort. Meanwhile, UK Defence Minister Robert Wallace conceded:
‘We’d like to cut Russia off from SWIFT… [but] it is difficult as not every country wants them out.’
Euro (EUR) Weakens on Ukraine Crisis, Mixed German Data
The Euro (EUR) is tumbling at the close of the week as tensions in Ukraine mount and economic data does little to buoy the currency.
Germany’s finalised GDP release revealed that the country’s economy contracted in the last quarter of 2021, although by less than expected – still, it remains the first decline in GDP in three quarters, due to the fourth Covid-19 wave and subsequent social restrictions.
Meanwhile, economists at MUFG bank observe that while the Euro usually performs better during risk-off events due to its large current account surplus, this is not the case today:
‘The rebound in risk sentiment following the sanctions announcements has resulted in safe-haven currencies weakening back. But the clearest pattern is the fact that European, non-oil related currencies have underperformed.’
Furthermore, HSBC analysts speculate that:
‘The escalation in Ukraine and related uncertainty about next steps could still see the EUR weaken versus the USD and JPY. The geographical proximity of the region and Europe’s reliance on commodity imports – particularly gas – are both sources of vulnerability.’
Pound/Euro Exchange Rate Forecast: European Economic Sentiment to Affect Rates?
Looking ahead, the Pound Euro exchange rate may be influenced later today by economic sentiment in the Euro area. Optimism is expected to have picked up through February, with the consensus forecast predicting a rise to 113.1.
Meanwhile, geopolitics will likely continue to have a significant effect on financial markets today and into next week. As Russia targets increasing numbers of Ukrainian towns and cities, it will become harder to justify hold off from imposing further sanctions – Russian oil and gas supplies are likely to be affected, potentially forcing another increase in energy prices.