Sterling falls to 2-month low versus dollar, biggest drop since March 2020

By Stefano Rebaudo

(Reuters) -Sterling crashed against a surging dollar in its worst day since March 2020 as investors rushed into safe-haven assets after Russian forces invaded Ukraine.

Missiles rained down. Ukraine reported columns of troops pouring across its borders from Russia and Belarus and landing on the coast from the Black and Azov seas.

Safe-haven currencies such as the yen and U.S. dollar were in demand, while riskier currencies, including sterling, dived.

The pound fell 1.8%, its biggest daily decline since March 2020, to $1.3302, its lowest since December 22.

“As for sterling, it’s a spectator,” Kit Juckes forex analysts at SocGen said.

“The UK is less vulnerable economically than the Euro zone, but not invulnerable. I expect EUR/GBP to continue trading in a relatively narrow range,” he added.

Sterling was down 0.1% versus the euro at 83.59 pence in choppy trade.

The narrative about future interest rates was also in focus, and investors’ views remained mixed.

BoE Chief Economist Huw Pill provided another dovish comment on Thursday by saying the central bank would seek to bring fast-rising inflation down in a “measured way” and one “that doesn’t disturb the rest of the economy”.

MUFG analysts said “the (Ukraine) conflict is likely to encourage market participants to scale back expectations for monetary tightening from major central banks in the near term.”

“We would expect the UK and U.S. rate markets to continue to adjust expectations more in favour of smaller 0.25 point hikes being delivered at their next meetings in March,” they added.

British finance minister Rishi Sunak said he had spoken with Bank of England Governor Andrew Bailey on Thursday to ensure financial stability after Russia’s invasion.

Money markets are pricing in a 55% chance of a 50 basis point (bp) rate hike from the BoE in March and fully pricing a rate increase of 125 bps by year-end.

“We doubt they (BoE officials) will want to further push back on aggressive pricing of the BoE cycle, which is providing support to GBP and helping to insulate against higher energy prices,” ING analysts said.

The UK rate market had already scaled back expectations in recent days for a 0.50 point hike following less hawkish comments from BoE Monetary Policy Committee officials.

BoE Governor Andrew Bailey said on Wednesday that markets should not get carried away about the likely scale of interest rate rises, while policymaker Silvana Tenreyro said she saw the case for further modest tightening.

(Reporting by Stefano Rebaudo; Editing by Barbara Lewis)