Home Daily Commentaries Risk appetite returned to markets yesterday

Risk appetite returned to markets yesterday

Daily Currency Update

Risk appetite returned to the markets yesterday which saw some recovery from the heavy losses seen over the previous days. The pound lost ground vs the euro. Russian and Ukrainian officials are due to hold talks in Turkey. Further to this, President Zelensky said that he is willing to commit to political neutrality by not joining NATO, in return for respect of the existing Ukrainian borders.

Given the euro is more exposed to the war than the pound, the news was a positive break for the euro and gave investors more confidence in the currency. It recovered some losses and pushed the pair down in the 1.19s and even briefly broke through in the 1.18s. It was only Monday when GBPEUR tested 1.21, and hence this was a move of over 2% lower for GBPEUR, highlighting the volatility that the Russia-Ukraine war is bringing to financial markets.

The pound could remain supported over the possibility that the Bank of England could increase interest rates by 0.25% in its next meeting later this month. With inflation being forecasted by the UK's central bank to remain above 7% before the war had started, the further rise in commodities prices after the war suggests that this inflation previously forecasted could now be undercooked. This could cause the Bank of England to raise rates, which appears to be supporting the pound somewhat.

Key Movers

The euro also gained some traction versus the dollar yesterday. The pair is likely to be affected by news about the ongoing crisis again today. A European Central Bank meeting will take place later this afternoon that could also have some impact. Many expect that the ECB may put a pause on the more aggressive stance they hinted at in their last meeting. The reasons for this are the ongoing conflict that is impacting the whole euro area, and the surge in energy prices, but also that the euro area appears to be witnessing a phenomenon known as stagflation, which is a continuing of inflationary pressure coupled with sluggish growth.

This gives Christine Lagarde and her central bank decision makers a tough decision to make. Tightening monetary policy by increasing interest rates is an effective way of curbing the ever-rising prices in the single bloc, but with slow growth metrics, raising rates too quickly could send the Eurozone into a recession. This could keep the euro under pressure for a while yet.

We also have inflationary indicators released from the US today, with US CPI. The Federal Reserve is expected to continue on their path of raising rates to combat their own inflation concerns, and a strong reading here could do little to move people away from this thought process. Leading banks such as Goldman Sachs continue to forecast as many as 7 rate hikes from the US central bank this year, which could help the US dollar bode well against its peers.

Expected Ranges

  • GBP/USD: 1.3060 - 1.3185 ▼
  • GBP/EUR: 1.1885 - 1.1965 ▲
  • GBP/AUD: 1.7860 - 1.7990 ▼
  • EUR/USD: 1.0980 - 1.1075 ▲