Sterling could record new gains against the US dollar in the coming weeks as more economic releases support expectations for Bank of England (BoE) tightening.

FX Strategists at UOB Group, have noted that the pound rose more than expected yesterday and this upward momentum could continue unless the British currency falls within the next couple of days.

However, the persistent Russia-Ukraine tensions will continue to impact on both the pound to euro and the pound to US dollar exchange rates.

GBP/EUR and GBP/USD: Ukraine-Russia tensions

The pound could maintain an upward trend against the euro, but analysts believe that the euro will prevail. The main driver for the pound to euro exchange rate is the Ukraine-Russian situation. The last week, we have witnessed the pound rising and falling, before recovering as news on the geopolitical tensions created volatility.  On Wednesday, optimism returned to markets but soon faded as it was made clear that nothing has changed and that over 120K Russian troops were still stationed on Ukraine's borders with little progress having been made.

This is why the pound to euro exchange rate will move according to news and speculation relating to the Ukraine-Russia issue.

The uncertainty about the Russia-Ukraine conflict will also put the pound to US dollar exchange rate at risk. Reports claiming that Ukraine has bombed separatists' positions in east Ukraine caused safe-haven flows to dominate the markets. Ukraine denied these claims and the Ukrainian military reported that Russian occupying forces fired on a village in the Luhansk region. A senior White House official said that Russia’s claim that is moving troops away from Ukraine’s border is false. He also warned that Russia could launch a false pretext to invade Ukraine at any moment. These developments have soured market mood as investors remain on edge.

A further escalation of geopolitical tensions could weigh on GBP/USD while a positive shift in risk sentiment will boost the pound.

European Central Bank

The turn in the European Central Bank’s policy which was announced on their 3rd of February update has supported the euro. The ECB said that due to inflationary pressures they would no longer be against a rate hike in 2022, which has led the market to price in a number of 10 point hikes to the Deposit Rate, that would take it back to 0% by the end of 2022. For the GBP/EUR currency exchange rate, what will determine its performance will be the timing of monetary policy tightening in relation to that of the Bank of England.

Foreign exchange strategists at HSBC believe that the euro will rise against the pound as they see  the Bank of England disappointing market expectations. They said: "We think there appears to be room for the Bank of England to disappoint relative to market pricing, which has more than a 50% chance of a 50bp hike.”

Want to book your ideal rate? If you are a business transferring funds overseas, contacting a currency specialist could save you time and money. Universal Partners FX and their dedicated team can offer valuable insights into the market ahead of your currency exchange. If you are transferring funds to pay your employees abroad, get in touch with Universal Partners FX to find out how much you can save in your international money transfers. Universal Partners FX can provide invaluable help, efficient risk management and tailored solutions to your business’ transfer needs.