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 was higher against the US dollar on Thursday, amid US dollar weakness and better-than-expected UK GDP.

The latest UK GDP figures have beat expectations and lent support to the pound. According to the ONS, the economy expanded by 1.3% during the final quarter of 2021 compared to the 1% estimated previously. UK Current Account deficit also fell to £7.3 billion in Q4 2021 compared to the revised reading of £28.9 billion in the previous quarter.

However, disappointing news have stopped further gains for the pound to US dollar exchange rate. The latest news about the war in Ukraine have shattered hopes for a diplomatic solution while the prospect of new Western sanctions against Russia, could also weigh on the pound and support the safe-haven US dollar.

In addition to this, due to the Bank of England’s softer and more cautious tone in regard to more interest rate hikes, the pound could fail to rise further against the US dollar.


According to a Kremlin spokesperson, there has been no breakthrough to the ongoing negotiations, while an adviser to Ukraine’s President said that Russia was moving forces from Kyiv to try and encircle troops and launch attacks in the eastern part of the country.

Market participants will closely watch any fresh developments surrounding the Russia-Ukraine conflict which will provide some momentum to the GBP/USD pair.

GDP Report

Britain’s economy grew faster than previously expected in the last three months of 2021 when the Omicron wave hit the economy. UK’s GDP rose by 1.3% in the fourth quarter from the previous three months, according to the Office for National Statistics.

The ONS said the rise was driven by human health and social work activities, including increased GP visits at the start of the quarter, coronavirus testing and tracing activities, and the extension of the vaccination programme. On the other hand, consumer spending growth was revised lower from 1.2% to 0.5%.

Paul Dales, senior UK economist at Capital Economics, said that the upward revision to GDP growth in the fourth quarter in 2021 was due to inventories, so is not as positive as it appears, while consumer spending was revised down. The squeeze on real incomes is already being felt, but the fall in the saving rate is providing support.

The data shows that the economy is only just 0.1% smaller than the Q4 2019 pre-pandemic level. The 9.4% fall in GDP in 2020 was revised to a smaller 9.3% fall, while the 7.5% rise in GDP in 2021 was revised down to a 7.4% rise. GDP growth will probably be around 4.0% this year, Dales said.


Financial analysts and strategists have commented on the Bank of England’s more dovish and cautious tone following concerns about economic growth due to the growing cost-of-living squeeze in the UK. The Bank of England has raised interest rates three times now and markets expect another one at their next meeting in May. Policymakers at the bank have become more cautious, especially after the war in Ukraine, with the prospect of a 50bp move having faded entirely due to a weaker growth outlook. Some analysts believe that there aren’t many more hikes to come, maybe maximum two more, despite market expectations for another five rate rises this year.

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 fell off its daily high after comments by Bank of England deputy governor Ben Broadbent. Broadbent spoke about the rise in UK inflation, which could reach up to 9% due to the surge in energy prices.

Ben Broadbent’s comments

Speaking at a conference at Gresham College in London, organised by the National Institute of Economic and Social Research and The Money Macro and Finance Society, the Deputy Governor of the BoE highlighted the risks of inflation which has been exacerbated by the war in Ukraine. He said: “From an economic perspective, coming on top of what was already a very steep rise in the cost of globally traded goods, in the wake of the pandemic, the invasion has led to substantial rises in the cost of energy and other commodities. As a big net importer of manufacturers and commodities, it’s doubtful that the UK has ever experienced an external hit to real national income on this scale. From the narrow perspective of monetary policy, it will result in the near term in the difficult combination of even higher inflation but weaker domestic demand and output growth.”

His comments come after the Bank’s Governor Andrew Bailey said that the UK is facing an energy price shock last seen in the 1970s. On Wednesday, Broadbent also referred to the “unpredictable shocks hitting the economy” and that “the appropriate path of interest rates is necessarily unpredictable as well.”

Household bills could rise to £2,500 by autumn

According to the influential forecasting group, EY Item Club (EYIC), normal household energy bills could rise up to £2,500 by autumn. The increase in energy and commodity prices partly the result of the war in Ukraine, will have a serious effect on households and slowdown economic activity. EY Item Club says that rising prices will add to UK inflation which is already at very high levels and predicts that inflation could peak at a 40-year high of 8.5% in April with prices growing by 6% at the end of 2022. The group has warned that the 54% rise in home energy bills this April means that lower-income households could experience an inflation rate of around 10%.

With more energy bill increases expected in October, the EYIC says lower-income households will have to deal with steadily higher levels of inflation relative to higher-income households, that could last beyond 2023. Chief economic adviser to the EYIC, Martin Beck, said that, while the recent Spring Statement included some help for households, consumers will experience the pain of inflation and a squeeze to real incomes: “Consumer spending is a key part of the UK economy, and the expectation has been that the passing of the worst of the pandemic would spur a corresponding consumer recovery. But the war in Ukraine and rising energy prices mean that outlook has dimmed.”

It is already noticeable that “UK shoppers are choosing to shop at discount supermarkets in greater numbers as grocery price inflation reaches its highest level in a decade amid a mounting cost of living crisis.”

Food price inflation, increased by the rising cost of such commodities as wheat and cooking oil has forced shoppers to change their habits and seek ways to save on basic necessities.

The UK’s poorest families are also expected to see the amount of spare cash fall by a fifth this year with £850 less to spend on non-essential items. According to the latest figures from market analysts Kantar, prices are rising the fastest for pet food and savoury snacks but continue to fall for some products such as fresh bacon. Price rises are also increasing due to the rising cost of labour and basic commodities, driven by a combination of Brexit, rising demand after the pandemic and the war in Ukraine.

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 has recovered against the euro and US dollar, but some analysts expect it to remain within the same range and not rise or fall remarkably. Markets seem to be a bit more optimistic and expect further Bank of England interest rate hikes. The war in Ukraine continues with little progress being made, and markets are starting to digest the implications of Russia’s aggression in Ukraine.

The pound was one of the worst-performing currencies since the war in Ukraine started and traders have adjusted to this. While some analysts believe the pound will be supported in the near-term, however, if the situation in Ukraine deteriorates, then it could drop.

Uncertainty continues for the pound

  • Ukraine conflict

Market risk appetite has returned modestly, and the pound will continue to benefit as sentiment improves. While the war in Ukraine continues, there is hope that a deal could be reached, as talks between the two sides continue. However, Dmitry Peskov, the Russian Presidential spokesman, said on Monday that the two sides were still far apart. There were also hopes that the two presidents, Ukrainian President Volodymyr Zelensky and Russian President Vladimir Putin would sit and resolve issues, but this looks to be highly unlikely, at the moment.

Analysts have noted that, after the Covid-19 pandemic and Brexit, the Russia-Ukraine conflict is another considerable risk and could stall any upside potential for the pound. The crisis has worsened the outlook for risk currencies such as the pound, with the euro being more vulnerable.

  • Bank of England interest rate hikes

Expectations for further Bank of England interest rate hikes has been a key driver for the pound and continues to lend support to the British currency. The Bank hiked 25 basis points last Thursday, as expected, but the cautious tone of the Bank about the number of rate hikes disappointed markets and pushed the pound lower.

The Bank has warned the market not to expect as many as 120 basis points of rate hikes which were priced in by the market for the rest of the year, as inflationary pressures could impact on economic growth. Some economists feel that it will be much more difficult for Sterling to strengthen following the BoE’s increased focus on inflationary risks to growth.

The pound has recovered recently, however, and the Bank of England remains much more hawkish than other banks, with at least two interest rates expected by most analysts.

Tuesday’s report: UK government borrowing higher than expected

UK government borrowing rose more than expected in February, as higher inflation pushed debt interest payments higher. This is disappointing news for Rishi Sunak the day before he presents his spring statement in the Commons.

The Office for National Statistics said the government’s budget deficit was £13.1bn in February, the second-highest borrowing figure for February since records began in 1993. Higher inflation pushed up interest payments on government debt by more than 50%. The chancellor responded to the higher-than-expected government borrowing by saying:

“The ongoing uncertainty caused by global shocks means it’s more important than ever to take a responsible approach to the public finances. With inflation and interest rates still on the rise, it’s crucial that we don’t allow debt to spiral and burden future generations with further debt. Look at our record, we have supported people - and our fiscal rules mean we have helped households while also investing in the economy for the longer term.”

Economists expect the chancellor to be cautious tomorrow. Samuel Tombs, chief UK economist at Pantheon Macroeconomics said that Rishi Sunak could “announce a limited package of measures, amounting to a net giveaway in 2022/23 of about £13bn, or 0.5% of GDP. That probably would mean that households still will experience this year the biggest annual decline in their real disposable income since the Second World War.”

Wednesday: What to watch

The UK’s CPI numbers on Wednesday are key as the Bank of England (BOE) has raised interest rates by 25 basis points last week. The UK inflation numbers on Wednesday will influence any potential  monetary policy decision the BOE will have to make in its next policy announcement.

The monthly and yearly Producer Prices Index (PPI) Core Output on Wednesday will also be watched, with a preliminary estimate for the monthly PPI Core Output at 0.9%, and an estimate for the yearly PPI Core Output at 10%, higher than the previous 9.3%.


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 under pressure as market mood has weakened following renewed concerns over Russia's invasion of Ukraine. The divergence between the Fed and Bank of England (BoE) policy has also hurt the pound and could continue weighing on the British currency.

The BoE hiked interest rates by 25 bps but showed caution regarding further tightening, dampening the pound outlook. Analysts expect the pound to US dollar exchange rate to remain under pressure if it continues trading at a lower level. The pound to euro exchange rate could also struggle to recover this week following the BoE’s cautious tone last Thursday.  

What to watch out this week

  • Andrew Bailey’s remarks

The key event of the week ahead for the pound will be Governor Andrew Bailey’s participation in a panel discussion this Wednesday titled Emerging Challenges for Central Bank Governors in a Digital World, at the Bank for International Settlements Innovation Summit.

  • Inflation figures

On Wednesday, inflation figures for February will also be closely watched as investors would like to see how soon the Bank could raise interest rates again.

Analysts expect the Monetary Policy Committee (MPC) of the BoE to be less optimistic and more passive in the second half of the year, which could drive the pound lower. It is now expected that the pound will be under pressure especially if inflation is higher than expected, and at a time when the BoE is concerned with the risks to growth.

  • Mini budget

Apart from February’s inflation figures and comments from Andrew Bailey, on Wednesday we also get HM Treasury’s announcement of its latest budget update, which will also be analysed by market participants. Chancellor Rishi Sunak is under pressure to announce further financial measures to support households who are suffering from the worst cost of living crisis for at least 20 years.

While the UK was getting ready for the biggest squeeze on living standards, the war in Ukraine has deepened the crisis. The surge in the price of oil has pushed petrol and diesel prices higher. Economists warn that further pressure on food and energy prices could push inflation even higher. With domestic energy prices and taxes already rising in April and continued volatility in commodity markets, the Chancellor of the Exchequer is facing even more pressure to alleviate the pain when he reveals the springtime mini-budget on Wednesday.

Now, the problem is not only the poorest households, as due to higher and persistent inflation families who needn’t worry about the cost of living are now also facing difficulties. The chancellor is expected to extend his earlier £9bn package of support for energy bills, which has been reduced by higher inflation. However, speaking to the Conservative conference in Blackpool, he avoided clarifying how he might help households with bills and admitted that global inflationary pressures and higher prices were out of his control. The chancellor said he had “enormous sympathy for what people are going through”, but “I can’t solve every problem. No government can solve every problem, particularly when you’re grappling with global inflationary forces. They are somewhat out of my control.”

Markets will await to see how Sunak will make a difference in his statement on Wednesday, whose popularity rankings have grown during the pandemic following a huge economic support package. As he said on Sunday, “I will stand by [the people] in the same way that I have done over the past couple of years. Where we can make a difference, of course we will.”

The pound has weakened after the Bank of England’s cautious guidance that markets are expecting more interest rate hikes than the Bank thinks are necessary. The UK currency fell against all its major peers in response to the divergence between what the market is expecting and what the Bank will deliver. The Bank's Monetary Policy Committee (MPC) on Thursday voted 8-1 to hike rates by 25 basis points.

While the Bank admitted that further hikes could be necessary, it noted that the market's expectation for the Bank Rate to be at 2.0% by the end of the year was too extreme. The news has disappointed markets as the Bank’s tone was not as hawkish and optimistic as expected. The market was pricing in a further 134 basis points of hikes for 2022 but after Thursday’s policy update, this has been reduced to 123 points.

BoE concerns

The Bank is now clearly concerned that the war in Ukraine will push inflation higher and will affect consumers and businesses, slowing down economic growth. With higher energy, food and commodity prices having increased due to the war in Ukraine, inflations will skyrocket to around 8% in April according to the Bank's forecasts.

The Bank worries that inflation will hurt demand as it expects it to fall faster than initially forecast over the medium-term. Hiking interest rates over-aggressively will help very little when inflation falls back. This is why the Bank has reduced some of its rate hike expectations. The Bank’s more dovish and cautious tone has weakened the pound, as markets are slowly digesting the news.

The foreign exchange market has diminished its expectations for 50bps hikes to be delivered at upcoming policy meetings and expects four more 25bps hikes at successive meetings up until September with another rate hike in 2023. The need for a more modest approach in the coming months is something that the Bank now considers to be more appropriate.

According to analysts, the Bank is in a difficult position as it is raising rates to tame inflation due to supply chain issues while at the same time the cost-of-living squeeze is affecting households.

The war in Ukraine will continue to hurt the pound and a possible de-escalation will offer support to the British currency.

ECB and the euro

The pound is expected to remain supported as analysts say, since the BoE will continue its interest rate hikes, but in the long term, the euro could benefit from expectations that the European Central Bank (ECB) will start changing its monetary policy and raise interest rates soon. According to Reuters, the President of European Central Bank, Christine Lagarde, said on Thursday during a news conference that the ECB has no intention of raising interest rates until some time after it has ended its bond buying programme at the end of the third quarter. Lagarde said: "Any adjustment to the key ECB interest rates will take place some time after the end of our net purchases under the APP (Asset Purchase Programme) and will be gradual.” Markets are now pricing in around 43bps worth of interest rate hikes this year. Investors have scaled back their expectations on rate hikes since the war in Ukraine broke out. The ECB president had discussed raising interest rates at a news conference on the 2nd of February despite insisting in the past that such a move was "very unlikely" in 2022.

The pound is at its lowest on Thursday as investors await the Bank of England interest rate decision. The Bank is expected to raise interest rates for the third meeting in a row by 25 basis points up to 0.75% at noon today. Despite the economic uncertainty following the war in Ukraine the Bank is anticipated to hike borrowing costs but to also strike a cautious tone about the economic outlook.

However, analysts have noted that market sentiment towards the pound might have now become too gloomy, as the pound has underperformed recently. If the Bank votes for a larger hike this month, then the pound could strengthen. According to market pricing expectations, 134 basis points of rate hikes will be delivered by the end of 2022, so that the Bank fights inflation.

Inflation concerns

Other economists remain optimistic and anticipate the Bank to deliver a supportive message especially since inflationary pressures will increase due to the war in Ukraine. Some economists have said that with accelerating inflation, the Central Bank will have to raise rates further. With the labour market tighter for a longer period of time, economists have said that the BoE will raise interest rates from 0.50% currently to 2.00% by the end of 2023.

Inflation has reached 5.5% in January, and is expected to rise over 7% in April, so the Bank will need to act by tightening its policy. Higher wages mean higher inflationary rates, which the Bank of England will control by raising interest rates. A wage-price spiral could develop at a time when struggling households seek help to respond to the cost-of-living squeeze.  

The higher oil and commodity prices after the Ukraine war have also added to the inflationary pressure and have hurt the UK’s economic outlook. It may not be an easy decision for the Bank but raising rates might be the most likely scenario.

Cautious BoE

The Bank of England could strike a more cautious tone than markets are expecting due to the war in Ukraine, which could push the pound lower. According to Barclays, if the Bank is concerned with growth following the war in Ukraine, instead of prioritising inflationary pressures this could weaken Sterling.

Markets will also be looking at how the members of the MPC will vote and, if the number of those voting for a 50 basis point rate hike falls, then this will also push the pound lower.

As RBC Capital Markets explained:

“The impact of the Russia-Ukraine war means that inflationary risks are very firmly tilted to the upside, and higher inflation is likely to persist for longer than previously thought with the hit to real incomes from that weighing on demand. At some point, the MPC will be forced to consider the trade-off between responding to higher supply-side-driven inflation and dealing with slower growth.”

Yesterday, the Federal Reserve raised US interest rates for the first time since 2018. Now markets are looking to see whether the Bank of England will increase its UK borrowing costs for a third time in a row. The BoE will have to make a tough decision as it faces a dilemma. On the one hand, inflationary pressures have increased following the war in Ukraine. On the other hand, UK households are struggling to manage higher costs following higher energy bills and higher taxes. But there are other concerns from Bank of England committee members who fear that the economy will enter a recession as a result of over-aggressive interest rate increases.  

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 rose on Wednesday following encouraging news on the peace talks between Ukraine and Russia. Economists at Scotiabank expect a hawkish Fed and a cautious BoE to push the pound against the US dollar lower.

While the Fed is expected to hike by 25bp today and signal 90bp of further tightening this year, the move is fully priced in by markets and the main driver for today will be the optimism surrounding the peace talks today. There are no data releases in the UK calendar today and the pound will continue to find support from market optimism around a possible de-escalation in Ukraine. Investors are also perhaps a bit cautious ahead of tomorrow’s Bank of England meeting, where a rate hike and more positive comments could help the pound rise. If there are no surprises from the Fed today, then the GBP/USD should be able to hold on its gains.

The positive market sentiment has also pushed European stock markets higher, with the FTSE 100 index in London up 1% at 7,249 and the Germany, French and Italian exchanges 3% ahead. The pan-European Stoxx 600 index rose 2.6%.

Russia – Ukraine peace talks

Ukraine’s president Volodymyr Zelenskiy said the talks were “more realistic” while Russian foreign minister Sergei Lavrov said there was “some hope for compromise,” with Russia demanding a neutral status for Ukraine.

Since the 24th of February when the invasion began, Russian troops have failed to seize any of Ukraine’s biggest cities, while they have aggressively bombed and destroyed smaller towns and cities.

What does Russia demand?

One of the central questions is what President Vladimir Putin wants, as many have claimed that he seeks to restore Russia’s sphere of influence over older Soviet territories like Ukraine, and to stop their links to the West. Putin also seems to want to overthrow Ukraine’s pro-Western government and install a pro-Russian puppet leadership, so Ukraine is under Russia’s influence.

In terms of the talks, Russia wants legal guarantees that Ukraine will never be allowed to NATO and wants Ukraine to sign a neutrality agreement and change its constitution to solidify this reality.

Moscow has demanded that Ukraine recognise the independence of pro-Russian republics of Donetsk and Lugansk. It has also demanded that Ukraine recognises Crimea, which it annexed in 2014, as Russian territory. And it has called on Ukraine to cease all military activity.

In a televised speech to government ministers on Wednesday, Putin referred to the pain that Western sanctions have inflicted on the economy but insisted that Russia could tolerate the blow. Trying to justify the war in Ukraine, he claimed that there were concerns that: “In the foreseeable future, it was possible that the pro-Nazi regime in Kyiv could have got its hands on weapons of mass destruction, and its target, of course, would have been Russia.” He said: Western countries wanted to turn Russia into a “weak dependent country; violate its territorial integrity; to dismember Russia in a way that suits them”.

He clarified that he was willing to discuss “the neutral status of Ukraine, its demilitarisation, and its ‘denazification’”.

What does Ukraine want out of the talks?

President Zelenskyy said on Monday that Ukraine wants a “fair peace” with Russia, but his country won’t surrender, or accept ultimatums from Russia. Ukraine has demanded a ceasefire with Russia but it won’t surrender any of its territory to Russia. Ukraine may be willing to forego NATO if there are “security guarantees” from the US and NATO about its safety.

An immediate concern for Ukraine has been the creation of humanitarian corridors to allow the safe evacuation of civilians. Mariupol, for example, is surrounded by Russian forces and has been bombarded with civilians struggling to survive with limited food, water and power. Ukraine has said that has send a convoy with humanitarian supplies to the port city on Tuesday and hopes to evacuate women and children as it returns, according to Reuters. More than 2,500 civilians have been killed in Mariupol since the war started, according to a Ukrainian official cited by Reuters.

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.

If the Ukraine conflict escalates, the pound will remain under pressure, economists at MUFG Bank said. The upcoming Federal Reserve (Fed) and Bank of England (BoE) monetary policy decisions could push the pound against the US dollar lower in the coming days, some analysts have warned.

On Monday, during early trading hours, European stock markets rose on hopes that peace talks between Russia and Ukraine could make progress. The GBP/USD pair also recovered from its daily low and climbed higher as risk sentiment recovered, pushing the safe-haven US dollar lower. Both sides have shown cautious optimism ahead of Monday’s negotiations, with a Russian delegate yesterday saying that there has been “substantial progress.” However, it is not clear how Russian president Vladimir Putin’s position has changed, since yesterday an attack on a major military base close to Poland’s border killed at least 35 people.

According to the Ukrainian general prosecutor’s office, ninety children have been killed and more than 100 wounded since Russia invaded Ukraine on 24 February. The highest number of victims are in the Kyiv, Kharkiv, Donetsk, Chernihiv, Sumy, Kherson, Mykolayiv and Zhytomyr regions, the statement said. Russia denies targeting civilians and has called the war a “special operation” to demilitarise and “de-nazify” Ukraine.

UK support for Ukraine

The British health secretary Sajid Javid said the Ukraine family scheme for refugees was “being made easier and more straightforward” from Tuesday. Talking to Times Radio, he said that “just over 3,000” visas had been granted through the programme. Javid said: “As well as that particular scheme, the extended family scheme being made easier and more straightforward by our online-only process from tomorrow, there’s the new homes for Ukrainian families scheme, which will also go live later this week.”

According to the government’s announcement on Sunday, as reported by Reuters, those who can offer a living space for refugees for at least six months could receive £350 a month. The "Homes for Ukraine" programme will have a website where individuals and organisations will be able to register by the end of next week. Those who offer a room or home for refugees will have to pass a criminal background check and show that their home meets required standards.

Central Banks

On Wednesday, we have the FOMC’s policy decision and on Thursday, the Bank of England’s decision. Both central banks are expected to increase their interest rate by 25bp. The market reaction will depend on their post-meeting statements and how optimistic or pessimistic the two banks are about the economic outlook.

Fed Chairman Jerome Powell pointed out that this Wednesday the Fed will possibly lift its interest rate from 0.25% to 0.5%, although financial markets expect a larger increase to 0.75%.

The BoE is widely expected to raise the Bank Rate from 0.5% to 0.75% on Thursday and 2% by year-end. BoE Governor Andrew Bailey had warned markets, even before the war in Ukraine, “not to get carried away” with their interest rate expectations. A cautious statement would push the pound lower, especially because the Fed is expected to deliver a hawkish decision on Wednesday.

Analysts believe that the GBPUSD and EURGBP will be sensitive to any important changes to the outlook for BoE rate hikes. Markets are currently pricing more than 5 hikes over the coming 6 months.

In the meantime, any new developments surrounding the Russia-Ukraine conflict will influence market risk sentiment.


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 UK economy has grown faster than expected as the economic damage caused by the Omicron variant receded. Despite the positive news, the pound continued to slide lower, especially against the US dollar. Fears that the war in Ukraine will impact on UK growth and that inflation will rise further have pushed the pound lower. In the coming week, the Bank of England is expected to hike interest rates by a further 25 basis points. Investors will closely watch comments by the Bank’s policymakers when they deliver their decision as well as how each member voted which could affect the pound.


New figures on Friday released from the Office for National Statistics show that UK GDP grew by 0.8% in January, faster than economists expected, after contracting in December when ‘Plan B’ restrictions were introduced to fight the Covid-19 variant. According to the ONS, every sector grew in January, with services, production and construction up 0.8%, 0.7% and by 1.1%, respectively. As the ONS reported: “Output in consumer-facing services grew by 1.7% in the month, mainly driven by a 6.8% increase in food and beverage activities, while all other services also saw growth on the month, by 0.6%.”

ONS director of economic statistics Darren Morgan said: “All sectors grew in January with some industries that were hit particularly hard in December now performing well, including wholesaling, retailing, restaurants and takeaways. Computer programming and film and television production also had a good start to the year. While supply chain issues persisted in certain sectors, output in both construction and manufacturing grew for the third month running.”

Economic uncertainty due to Russia’s invasion of Ukraine

January’s recovery means the UK economy is now above its pre-pandemic levels, but the war in Ukraine poses a serious threat to recovery. Responding to today’s report, Chancellor of the Exchequer, Rishi Sunak, said: “We have provided unprecedented support throughout the pandemic, which has put our economy in a strong position to deal with current cost of living challenges. We are continuing to help people where we can, including through over £20bn of support this financial year and next. We know that Russia’s invasion of Ukraine is creating significant economic uncertainty and we will continue to monitor its impact on the UK, but it is vital that we stand with the people of Ukraine to uphold our shared values of freedom and democracy and ensure Putin fails.” The Chancellor is expected to provide much-needed support for UK households which are struggling with higher living costs. Economists have warned that the government’s package of a £200 energy bill rebate (repaid over five years) and a £150 council tax rebate for some households is not enough to alleviate the cost-of-living crisis.

What economists say about the GDP report today

Paul Dales of Capital Economics has said that the war in Ukraine and the cost-of-living squeeze will weigh on growth, despite January’s rebound. He said that from March and April households will begin to feel the blow due to higher energy prices and the war in Ukraine. Because of this, economic growth will slow down throughout the year.

KPMG UK chief economist Yael Selfin has also said that the conflict in Ukraine will hurt recovery: “Further headwinds for the UK economy are likely to arise from the elevated levels of uncertainty, tighter financial conditions, and disruptions to trade, potentially reducing GDP growth to 3.3% this year and to 0.8% next year.”


The sanctions and concerns about the supply of commodities, could revert some of the progress made by companies recently, as many UK firms have reported that supply chain issues have eased.

Russia – Ukraine conflict impacting on global economy

The sanctions on Russia have also affected the Russian economy which could enter into a deep recession.  In the global economy, the conflict has pushed commodity prices and inflation higher and hurt financial conditions and business confidence.

The ban on oil imports from Russia by the US and UK along with the widespread sanctions will be followed by more economic pressure on Russia by the US. According to reports from Reuters and Bloomberg, US president Joe Biden is expected to call later today for the end of normal trade relations with Russia, which will allow for increased tariffs on Russian imports.

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 was lower against the US dollar amid a cautious market mood. The latest peace talks between Russia and Ukraine have failed, and the two sides have not yet reached a ceasefire agreement. The war and US inflation fears will boost the US dollar's haven demand. The pound is stronger against the euro, but if sentiment declines further then both currencies will lose value against the dollar. However, analysts believe the pound could rise against the euro. With uncertainty and the possibility of a breakthrough in the negotiations looking highly unlikely, the foreign exchange market will remain volatile.

Russia – Ukraine talks

No progress has been made after a meeting on Thursday between Ukrainian Foreign Minister Dmytro Kuleba and Russian Foreign Minister Sergei Lavrov in Turkey's Antalya. Ukraine’s foreign minister said he discussed a 24-hour ceasefire with his Russian counterpart who defended the invasion and said it was going as planned. The meeting is the first high-level contact between the two sides since Moscow invaded Ukraine at the end of February. While officials from Kyiv and Moscow have met previously, this is the first time Russia sent a minister for discussions.

Lavrov said Russia wants to continue the negotiations with Ukraine and underlined that Russia would not have started the war if the West approved “our proposal on security guarantees.” He added: “Until the end, we wanted to resolve the situation in Ukraine through diplomatic means.”

Market optimism could be hurt from the risk of a further escalation in tensions between Russia and the West, while investors are concerned about inflationary pressures’ impact on the global economic outlook. This will limit any potential gains for the pound against the US dollar, and with little economic releases from the UK, the British currency will be driven by US dollar dynamics. 


The euro held most of its gains from yesterday as investors await the latest ECB policy decision for  fresh stimulus. The war in Ukraine might not push the ECB to change its hawkish stance especially when inflation is so high. The risk of a further escalation of tensions between Russia and the West could push the euro lower.

Bank of England

Uncertainty from the invasion of Ukraine will limit the number of rate hikes by the Bank of England (BoE) despite concerns for embedded inflation. Economists at Westpac note that the GBP/USD pair is at risk of suffering a sharp decline. Concerns about the cost of living will limit any upside potential for the pound and further rate rises. They said: “BoE had cited the cost-of-living pressures as a reason for a more gradual tightening path, but they will also be unable to ignore surging inflation. The net outcome is likely to be a lower and slower path of withdrawing accommodation.”

Global Inflation concerns

Markets remain concerned with rising inflation and commodity prices which could lead to a global recession. A global growth slowdown will support the safe-haven US dollar.

The euro however found support from the prospect of EU member states issuing a joint bond to finance increased defence spending and ease the impact of the energy crisis. The European Council will meet today in Versailles, France and more details might become clear. Analysts noted that such plans could end up being steeped in bureaucracy.

If the war in Ukraine continues, the euro will be lower against commodity and safe-haven currencies. Volatility will continue in the currency markets, while the exclusion of Russian commodity exports from global markets will increase inflation and require the establishment of new supply chains and routes.