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.