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.