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Inflationary pressures could be heightened as war continues

Friday 4 March, 2022

Daily Currency Update

As the tragic situation in Ukraine enters its 9th day, concerns in global markets remain around the impact on inflationary pressure. It was only two weeks ago that we saw UK CPI post a figure we hadn't seen for almost 30 years, as inflation hits record highs. The Bank of England has remained nimble and has increased interest rates twice already in their last two meetings. The recent rally in the pound versus the euro, to levels we haven't seen since 2016, suggests that more could be on its way when the central bank in the UK meets again on the 17th of March. The pound’s rally also coincided with UK government bond yields recovering following their sharpest one-day fall since the Brexit referendum. Investor sentiment has improved marginally as the markets hope a ceasefire may be negotiated between Russia and Ukraine. Newswires reported yesterday that Russian negotiators had said a ceasefire was on the agenda when talks with Ukraine commence, though a location for said talks has not been decided.

Key Movers

Economic data released on Thursday came in mixed in the US, with initial Jobless Claims dropping to eight-week lows at 215,000. We also saw Chairman Jerome Powell of the Federal Reserve testify during his semi-annual interest rate policy testimony before Congress. Interestingly he stated that we could see the rate hike in March being just a quarter of a point, whereas some sections of the market are forecasting that the Fed may need to raise by up to 0.5% in their next meeting. He went on to state that he is willing to do whatever it takes to slow inflation, underscoring the Fed's high-risk challenge in raising interest rates enough to stem price increases without tipping the economy into another recession. Stagflation is a term being used recently when describing the Eurozone economy. There are significant concerns that with the current geopolitical back drop, there could a cooling off in the labour market in Europe, plus with potential price rises in energy a high inflation and low growth environment could occur. This concern has seen the euro continue to weaken against its peers, seeing GBPEUR at the highest level since before the Brexit referendum in 2016. EURUSD also continues to be supressed as the US dollar remains on the front foot, predominantly due to investors favouring the currency during these unprecedented times and risk aversion.

Expected Ranges

  • GBP/USD: 1.3260 - 1.3325 ▼
  • GBP/EUR: 1.2065 - 1.2140 ▲
  • GBP/AUD: 1.8010 - 1.8165 ▼
  • EUR/USD: 1.0910 - 1.1045 ▼