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%.