The pound has fallen to three-week lows against the US dollar due to UK political concerns and the deepening risk-off mood. It has started to recover some of its losses and could rise higher if global market sentiment improves.
With geopolitical tensions rising between Russia and Ukraine and NATO sending reinforcements to eastern Europe, markets are worried, while safe-haven US dollar has strengthened as a result.
Ukraine – Russia tensions
Around 8,500 US troops are ready for a possible deployment to Eastern Europe as Russian troops concentrate on Ukraine's border. US Secretary of Defence Lloyd Austin issued the prepare to deploy orders following the direction of President Joe Biden, as the US gets ready for a potential Russian invasion of Ukraine.
The goal of sending military reinforcements to Eastern Europe is not to take part in any combat but to reassure allies and provide deterrence.
NATO allies have also put forces on standby as the Ukraine crisis escalates. Biden held a video call with European leaders on Monday afternoon in response to Russia's aggressive actions in Ukraine.
Following the online meeting with US, France, Germany, Italy, Poland, the United Kingdom and the European Union leaders, NATO Secretary General Jens Stoltenberg said, "We agree that any further aggression by Russia against Ukraine will have severe costs." He added that "NATO will continue to take all necessary measures to protect and defend all Allies, including by reinforcing the eastern part of the Alliance.”
Moscow has denied any plans to invade Ukraine and accused the US and NATO of escalating tensions over their support for Ukraine. The Kremlin on Monday rejected the reports about plans to install a pro-Russian leader in Ukraine as “fake.” Kremlin spokesman Dmitry Peskov said that “Tensions are escalating due to concrete actions taken by the US and NATO. I mean, the informational hysteria that we are witnessing. It is generously framed by a huge amount of false information, just lies and fakes."
Further to geopolitical tensions, the pound has also been affected by global market sentiment. Analysts have pointed out that the pound could recover in the short-term if the global stock market retreat comes to an end. Nonetheless, analysts expect 2022 to be a volatile year for investors and this will make it harder for analysts and traders to forecast pound price movements.
Sterling has fallen against the euro and dollar after investors sold stocks and other related risk assets in anticipation of higher US interest rates and tensions on the Ukraine border. The outlook remains volatile as the pound tends to fall against the euro and dollar when stocks are sold. Financial analysts believe that volatility will continue as traders readjust to rising inflation and interest rates.
The Swiss franc, US dollar and Japanese yen have all benefited, while the commodity currencies such as the New Zealand and Australian dollars, the Norwegian krone and emerging market currencies have all posted losses.
The pound could benefit from rising demand for UK assets and when investor capital flows back in the UK.
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