Sterling Weaker Amid Growing Russia-Ukraine Tensions and US Fed Meeting Jitters

Sterling fell to a new three-week low against the US dollar yesterday as investors maintained a risk-averse appetite amid the growing tensions in Ukraine and anticipation of a US Federal Reserve rate hike.

The British pound, considered to be a risked currency, suffered most of its weakness from the global standoff over a possible invasion of Ukraine by Russia. Russia released a statement on Tuesday noting that it was “watching with great concern,” after the US readied 8,500 troops to be immediately deployed to Europe in case of an escalation in Russia-Ukraine tensions.

Meanwhile, head of FX strategy at Rabobank London, Jane Foley, noted that: “The US dollar is a safe-haven suggesting that cable is likely to slip on any further increase in tensions.”

As mentioned earlier, investors remain on the sidelines as markets closely watch the Fed meeting closing today for clues to the possible removal of its massive stimulus program. The anticipation around this event extended significant bullish impetus to the greenback against a basket of other currencies.

At press time, GBP trades on a weak tone against the USD at the critical 1.3500 level, after printing a three-week low at 1.3436 yesterday.

Sterling Weakens Against Euro Amid BoE Rate Hike Expectations

Against the euro, the British pound rose to 83.61 pence after hitting its lowest level in 2022 on Monday. Foley noted that the increasing cost of living in the UK could prompt investors to cut down their Bank of England interest rates bets for 2022.

Meanwhile, markets have begun pricing in a possible BoE interest rate hike in February, following an unexpected hike in December to 0.25%. The Rabobank chief strategist noted:

“Although we think that the Bank will hike rates again in February, in our view, the Bank may be unable to hike again this year in view of the impact on demand from falling real wages.

“If the market back-tracks on interest rate expectations, GBP could be left exposed.”