Sterling falls versus dollar, holds ground against euro

By Stefano Rebaudo

(Reuters) – Sterling fell against the dollar but stood its ground versus the euro as investors rushed into safe-haven assets after Russia launched an all-out invasion of Ukraine by land, air and sea.

Ukraine’s President Volodymur Zelenskiy said Kremlin leader Vladimir Putin’s aim was to destroy his state, while U.S. President Joe Biden and other Western leaders promised tough new sanctions in response.

Safe-haven currencies such as the yen and U.S. dollar were in demand after Ukraine said Russia had launched a full-scale invasion while riskier currencies tanked.

The pound fell 0.4% to 1.3484 against the dollar after hitting its lowest level since February 1 at $1.3464.

“GBP-USD will probably limit its margin to the downside below 1.35,” Unicredit analysts said.

Sterling was down 0.05% versus the euro at 83.47 pence, after hitting its lowest level overnight since Feb. 3 at 83.07 pence.

The narrative about future interest rates was still in focus, with investors’ views mixed ahead of Bank of England speakers scheduled for later in the day.

“We doubt they will want to 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.

But MUFG analysts argued “the 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 US 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.

Money markets are currently pricing in a 55% chance of a 50 bps rate hike from the BoE in March and fully pricing a rate increase of 130 bps by year-end.

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

Bank of England 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 Gareth Jones)