In worrying times like this, it is important for us to point out that we completely acknowledge the wider implications of international conflict. Our principle duty as a company is to ensure that our clients are aware of all of the factors that affect currency exchange rates, which sadly sometimes includes war. Our thoughts are with everyone who is being affected by this escalating situation, and our currency updates do not intend to diminish, ignore or undermine the true impacts of this conflict.

The pound is expected to remain under pressure against the euro and the US dollar as market sentiment has weakened due to the war in Ukraine and economic sanctions against Russia.

The UK has announced new sanctions after Russia’s war crimes in Bucha, including a ban on all new investments coming into the country, as well as an asset freeze on Russia's Sberbank and Credit Bank of Moscow. Both banks hold more than one-third of Russia's total banking assets. The UK will also end all imports of Russian coal and oil by end of 2022 and take action against Russian oligarchs and key industries. Announcing the sanctions yesterday, the Foreign Secretary Liz Truss said: “Our latest wave of measures will bring an end to the UK’s imports of Russian energy and sanction yet more individuals and businesses, decimating Putin’s war machine.” She added: “Together with our allies, we are showing the Russian elite that they cannot wash their hands of the atrocities committed on Putin’s orders. We will not rest until Ukraine prevails.”

Bank of England interest rate expectations

The pound will be also at risk from market rate hike expectations, despite the Bank of England’s (BoE) cautious tone. Economists at Commerzbank have warned that the pound is at risk of suffering a significant fall, since the BoE failed to convince the market. They said: “So as long as the economic weakening is not reflected in the data the market will probably continue to bank on the BoE hiking its key rate from the current 0.75% to above 2% by the end of the year due to high inflation levels.”

“We see the risk of the market having to lower its rate hike expectations, which is likely to put pressure on sterling.”

UK firms expect the war in Ukraine to hit sales

According to a survey from the BoE, almost half of UK businesses expect Russia’s invasion of Ukraine to hit their sales in the year ahead. The bank’s latest poll shows that uncertainty and inflation concerns are growing, with almost half of the respondents citing the Russia-Ukraine war as a risk to their business with an average impact expected to be around -3%.

Around 49% of firms said the level of uncertainty for their business was “high or very high” with uncertainty about future sales growth also having increased moderately. Firms are extremely concerned about rising inflation and are expecting to raise their prices over the next year.

Talking on Thursday, Bank of England Chief Economist Huw Pill highlighted concerns about inflation and said that QE may not be the right tool to tackle bond market turmoil, especially because "Now that inflation is much higher, and threatening to go higher still, that can no longer be taken for granted.”

Pound and investor sentiment

The performance of the pound against both the US dollar and the euro is usually an indicator of market sentiment and if the market underperforms, then the pound does too.

With the escalation of the war in Ukraine and new sanctions, the risks for financial markets have increased too and the pound is vulnerable to further losses if tensions continue.

Some analysts have noted that despite market’s interest on the BoE and interest rates, the currency market is more concerned about global risk appetite and what is happening at the geopolitical level.

The pound has tended to struggle against its major peers during times of uncertainty and conflict and the war in Ukraine has contributed to uncertainty, exacerbated inflation worries and increased concerns about slower domestic growth.

While the British currency might be better supported than the euro, it will remain vulnerable as long as market sentiment is cloudy.

 

In worrying times like this, it is important for us to point out that we completely acknowledge the wider implications of international conflict. Our principle duty as a company is to ensure that our clients are aware of all of the factors that affect currency exchange rates, which sadly sometimes includes war. Our thoughts are with everyone who is being affected by this escalating situation, and our currency updates do not intend to diminish, ignore or undermine the true impacts of this conflict.

The cloudy market mood due to fresh western sanctions against Russia and atrocities against Ukrainian civilians has hurt the risk-sensitive pound. Adding to this is the policy divergence between the Bank of England and Federal Reserve, as the latter remains more hawkish and determined to tighten monetary policy. For those exchanging pounds to US dollars or vice versa, the key event will be the Fed minutes released later today at 7pm BST.

The pound weakened since yesterday, despite starting the new week on a positive note, as investors’ confidence was hurt following rising tensions in the Russia – Ukraine conflict, reports of war crimes and western sanctions against Kremlin.

Central Bank divergence

Markets are expecting the Federal Reserve to proceed to aggressive tightening, with the potential to announce both a balance sheet reduction and bigger rate increases in the upcoming May meeting.

The divergent monetary policy outlooks between the Fed and the BoE have kept the pound lower against the US dollar. BoE policymakers remain in a difficult position and have avoided pointing to any further rate rises, as they fight surging inflation and risks to economic growth.

Traders will focus on the Fed March meeting minutes for guidance regarding a rate hike in May. Chairman Jerome Powell has said previously that the minutes will contain details of the bank’s plan for quantitative tightening including the size of the targeted monthly balance sheet reduction.

Market participants expect the balance sheet to shrink by $US2½ trillion, but some analysts have noted that the Fed will be less aggressive, and the US dollar could weaken in response.

The US dollar rose against both the euro and the pound after two US policymakers warned that the Federal Reserve could decide as early as next month to begin shrinking its near-$9trillion balance sheet faster than expected.

Ukraine and Eurozone politics

The euro is lower and pressure on the single currency will continue as the Russia – Ukraine conflict and rising political risks ahead of the French elections persist. The upcoming April presidential election in France and uncertainty about the outcome will weight on the euro.

New sanctions against Russia will have a negative impact on both the euro and the pound. Both currencies will also continue to be under pressure as the war in Ukraine rages on and energy supply risks continue too. The imposed sanctions will affect negatively western countries and Europe in particular. The White House said that the US government and its allies will impose new sanctions on Russian banks and officials on Wednesday and ban new investment in Russia. The head of the European Commission also said that there will be further sanctions including examining energy imports on top of those announced on Tuesday.

Headlines regarding news about the war in Ukraine will influence both the euro and the pound and both will also be sensitive later today to the release of the minutes from the March meeting of the Federal Reserve.

Scotiabank and Credit Suisse economists expect the pound to weaken further. As Scotiabank analysts noted, “widening gilts-UST yield differentials have begun to weigh more clearly on the pound in recent trading” and could even go lower. They added that the pound will weaken further as the “gap between year-end hike expectations widens further.”

In worrying times like this, it is important for us to point out that we completely acknowledge the wider implications of international conflict. Our principle duty as a company is to ensure that our clients are aware of all of the factors that affect currency exchange rates, which sadly sometimes includes war. Our thoughts are with everyone who is being affected by this escalating situation, and our currency updates do not intend to diminish, ignore or undermine the true impacts of this conflict.

The pound to US dollar exchange rate has risen and remains resilient despite a strong greenback. A cautious market mood amid intensifying tensions between the West and Russia over Ukraine could limit any advance in the risk-sensitive pound ahead of the UK and US Services PMIs.

The focus will remain on the Russia – Ukraine conflict. While Moscow announced that it has moved troops away from Ukraine’s northern region, Kyiv reported the massive assassination of civilians and war crimes.  As a result, Western nations have announced plans to add sanctions on Russia. This could also make the negotiations more difficult as Russia and Ukraine strive to reach a diplomatic solution.

On Saturday, one of the negotiators for Ukraine said that there was enough progress to organise a meeting between Russian President Vladimir Putin and Ukrainian President Volodymyr Zelensky to discuss a peace agreement. However, investors are sceptical and risk-sensitive assets remain at a disadvantage.

Sanctions against Russia

  • Europe

The European Union is working on a new package of sanctions against Russia that could restrict the leasing of airplanes and the import and export of products like jet fuel, steel products and luxury goods, according to CNBC sources. The EU remains unsure about extending sanctions to energy imports.

The sanctions follow reports that 410 bodies had been found in towns from where Russian forces have retreated, while media reported on the mass killings of civilians in the town of Bucha.

The bloc is now working on a fifth package of sanctions against Russia which will be approved later this week.

  • US

On Monday, the United States stopped the Russian government from paying holders of its sovereign debt more than $600 million from funds held at American banks. While the US had already put in place sanctions which froze foreign currency reserves held by the Russian central bank at US banks, the Treasury Department still allowed the Russian government to use the funds to make coupon payments on dollar-denominated sovereign debt on a case-by-case basis.

On Monday, however, the US government decided to cut off Moscow's access to the frozen funds in order to force Moscow to make the difficult decision of whether it would use dollars that it has access to for payments on its debt or for other purposes, such as financing its war effort, the US Treasury spokesperson said. As the US spokesperson said, "Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default."

Bank of England interest rate hikes

The pound could be vulnerable against both the US dollar and the euro, as economists at Rabobank said. They expect the market to reassess the UK rate outlook following the Bank of England’s softer and more dovish tone. They have noted that “the market may still have too many rate hikes priced in. This leaves GBP vulnerable against both the USD and the EUR.”

“Some market commentators have started to speculate that the BoE may think twice about hiking interest rates beyond May. Our house view is that the tightening cycle could persist a little longer to ensure that inflation expectations remain well-anchored,” Rabobank said.

With currency markets expecting five more hikes by the end of 2022, the pound will remain supported. However, any new sanctions and developments affecting the energy market could push the pound lower.

Universal Partners FX are delighted to release their annual financial report for 2021-2022.

After the close of our company financial year, we are proud to celebrate another year of exceptional growth, of which the highlights are:

  • Gross profit increased to £3.2million (up 37.15%).
  • Operating profit increased to £1.17million (up 2.95%).
  • New clients increased by 37.21% to 118*
  • UPFX staff headcount has increased by 33.33%.
  • New cash position increased to £2.25million (up 38.48%)**

* New customer increase is based solely on customers who generate £10,000 or more per annum.

** Post year end the directors injected an additional £2,000,000 further improving the cash position of the business.

 

To download the full report you can do so by clicking the link below:

UPFX-Annual-Financial-Report-Oct-20-Sep-21_V2.pdf (1.62 mb)

 

To view our audited accounts and financial statement click the link below:

UPFX-Accounts-YE-September-2021.pdf (400.08 kb)

 

The market remains cautious ahead of speeches from Bank of England officials later this Monday. Analysts have noted that any move higher for the pound to US dollar exchange rate will be limited, as Treasury yields have advanced further due to the hawkish Federal Reserve outlook, which could help support the US dollar.

BoE Governor Andrew Bailey’s speech

In particular, markets will focus on BoE Governor Andrew Bailey’s speech at the Stop Scams Conference at 10.05am (BST). Later at 3pm (BST), the Bank of England Deputy Governor Sir Jon Cunliffe will give a speech at a European Economics & Financial Centre seminar.

Bailey said last Monday at an event held by the Bruegel thinktank in Brussels that the situation remains very volatile in relation to May’s interest rate decision. Britain’s economy is expected to slow down amid the biggest shock from energy prices since the 1970s, the governor of the Bank of England has warned. He said that demand from consumers and businesses will also slow down due to the cost-of-living squeeze, with the prices for gas, electricity and other goods and services to continue to soar.

He said: “The shock from energy prices this year will be larger than any single year in the 1970s. The caveat is that the 1970s had a succession of years and we very much hope that would not be the case now. But as a single year, this is a very, very big shock.”

Bank will demonstrate a softer tone and act cautiously

Economists at MUFG Bank believe that weaker growth will force the Bank of England to act cautiously. They stated: “We see potential for the BoE to pause its tightening cycle after hiking in May and August as weaker growth throughout the remainder of the year will provide justification for that and act to weigh on GBP performance. We have revised lower our GBP forecasts based on a more cautious BoE given the weaker growth outlook.”

Consumer Confidence

The higher cost of living and surging food and energy prices have hit UK consumer confidence which is down to its lowest level since the pandemic.

According to a new report from PwC on Monday morning,  there was a “significant and sustained drop-off in consumer sentiment” with its index of UK consumer confidence falling to -20 this month, from +10 last summer. The 30-point drop in the last nine months is the biggest decline in PwC’s survey since Global Financial Crisis in 2008, with households facing the biggest squeeze in decades.

PwC has warned that the sharp drop shows the impact that the cost-of-living crisis is having across the UK. Lisa Hooker, Leader of Industry for Consumer Markets, PwC UK, explained:

“This shift in sentiment is both significant and sudden, with consumer spending expectations moving towards more essential areas at the expense of discretionary items. Businesses that help customers by offering them the options to trade down are more likely to keep their loyalty for when things get better.”

As PwC noted, those businesses that can help consumers now will benefit later, as consumers will remember and reward these businesses. They emphasised that consumers do not tend to switch to cheaper options but look for special offers within the same retailer or hospitality provider, so if such businesses trade down by offering special offers, cheaper brands, or set menus, they will more likely keep their loyal customers when things improve later.

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