The pound is one of the worst performing currencies of the week and last month following Russia's invasion of Ukraine. While analysts have noted that it won’t weaken further, they have also said that there’s little hope for a rebound in the near-term.
Russia – Ukraine War
On Wednesday morning, the British Ministry of Defence published its latest intelligence report on the situation in Ukraine and said that Russian forces have moved into the centre of Kherson, but logistical issues and strong Ukrainian resistance has limited their gains. Russian artillery and air strikes have also continued to hit built-up areas, in the cities of Kharkiv, Kyiv, Mariupol and Chernihiv. Around 660,000 civilians have been displaced and forced to flee the country.
In Kharkiv, Russian troops engaged in fighting with Ukrainian forces while a Russian missile strike hit a police building and a university in the morning hours. Overnight, in Kherson, in southern Ukraine, Russian forces took control of the railway station and the port.
Ukrainian defence minister Oleksii Reznikov said that Ukraine will receive more Stinger and Javelin missiles from abroad, and more Turkish drones.
The United Nations reported that 136 civilians have been killed in the invasion, but the real number of people could be higher. At least 21 people have been killed and 112 wounded from bombing in Ukraine’s city of Kharkiv, according to the regional governor.
Vladimir Putin to ensure Russia’s financial stability
Following reports from Russia state media, President Vladimir Putin has signed a declaration to prohibit Russians from leaving the country with more than $10,000 in foreign currency, in an attempt to ensure Russia’s financial stability.
The Russia news agency stated that “The export of foreign currency cash and foreign currency instruments over $10,000 calculated based on the official exchange rate set by the Russian Central Bank on the day of export will be banned starting on March 2.”
President Biden’s State of the Union address
On Tuesday evening, US president Joe Biden delivered his first State of the Union address from Capitol Hill. He praised the Ukrainian people’s determination to fight and said that Putin must “pay a price” for his actions in Ukraine. The US plans to ban Russian flights from its airspace, the US president confirmed. The decision follows similar ones by the European Union and Canada.
As the US Department of Transportation and Federal Aviation Administration said, by the end of Wednesday, orders blocking Russian aircraft and airlines from entering and using all US airspace will be fully in effect.
Pound and Bank of England
The pound has fallen mainly because investors now expect less interest rate hikes from the Bank of England over the course of 2022 and 2023, following the invasion of Ukraine.
While up until the 22nd of February, 134 basis points of Bank of England interest rate hikes were priced for 2022 in OIS markets (a measure of investor expectations for future rate hikes), by the end of February these expectations have fallen to 126 basis points, and since March to 111.
Such a change in expectations could weigh on the British currency, as the pound tends to strengthen when rate expectations are high.
If the war in Ukraine continues and markets remain on edge, then investors will lower their expectations for rate hikes further, putting the pound under pressure. If, however, anxieties begin to ease and the situation in Ukraine improves, then rate hike expectations will start to rise again.