The pound rose against the US dollar, and the euro strengthened as global market sentiment has improved. With improved global investor mood and news that European countries could issue a joint bond to finance new defence spending and the area’s energy crisis, the euro rose. Stock markets rallied following the positive market sentiment.
Reports suggesting that Ukraine won’t insist on NATO membership has also boosted hopes of a de-escalation of the crisis ahead of Thursday's meeting between Russian Foreign Minister Sergei Lavrov and his Ukrainian counterpart Dmytro Kuleba.
For the moment, risk sentiment is the main market driver, and the pound could extend its recovery if the situation improves.
Russia has agreed to a new 12-hour ceasefire to allow civilians to flee some of the most affected areas in Ukraine, according to Ukraine's Deputy PM Iryna Vereshchuk.
Bank of England
On Tuesday, the British government announced that it will slowly reduce its imports of Russian oil and oil products by the end of this year. Economic activity will be hurt by the rising oil prices, Bank of England (BOE) Monetary Policy Committee Member Silvana Tenreyro said at a discussion hosted by Britain's Economic Research Council. She added that there was no immediate evidence of a wage-price spiral in the UK. She explained that policymakers would begin to review economic activity at March's Monetary Policy Committee meeting and when the BoE next updates its forecasts in May. She noted: "Recent developments will intensify the terms of trade shock that we were already experiencing, so will push up inflation and have a negative impact on activity. How exactly? That's the job we will start next week.”
Financial markets still expect the BoE to raise rates from 0.5% to 0.75% on the 17th of March, and as high as 1.5% by August in order to control surging inflation from becoming rooted.
She clarified that if the UK's action on Russian oil imports weighs on growth, then the BOE could avoid tightening monetary policy, but such a move could hurt the pound.
The euro rose on Wednesday due to improved sentiment and news that the EU Commission will announce plans of EU countries jointly issuing bonds to finance energy and defence spending. The move is seen as supportive of the common currency. The prospect of joint bond issuance has boost sentiment and helped to push the euro higher.
The plan for the jointly issued debt will be announced at Thursday's meeting of the European Council where leaders will meet to discuss the ongoing war in Ukraine. Bloomberg reported that the EU Commission could issue bonds and then send the funds to member states in the form of concessionary loans to finance spending in those countries.
The euro dropped against the dollar, pound and other major currencies since the war in Ukraine began due to diminished expectations about the Eurozone’s economic growth. The euro and European currencies have been hurt by the war and could drop even further if the situation worsens. Markets will remain highly sensitive to news and developments relating to the war in Ukraine. The pound will remain under pressure against the US dollar but supported against the euro if the conflict continues.