Sterling struggles under heavy markets

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  • Markets in the red again
  • GBP suffers against EUR and USD
  • But gains on AUD, NZD and ZAR
  • Ukraine a source of geopolitical concern
  • Markets jittery ahead of Fed meeting midweek

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Another risky session means the British pound is down against the euro, dollar, franc and yen, but is up against the Australian dollar, New Zealand dollar and market currencies emerging.

Currency markets have adopted a risk-on/risk-off mindset amid an ongoing global sell-off in equity markets, thanks to a combination of fears over higher future interest rates of the Federal Reserve and an impending Russian invasion of Ukraine.

“Riskier assets are down this morning as investors seek safer bets in traditional safe havens like the Japanese yen and gold, which is currently near 2-month highs. Fed, rising tensions in Ukraine and growing concerns about a Russian invasion add to the ‘risk-free’ mood,” says George Vessey, currency strategist at Western Union.

The exchange rate between the pound and the euro extended Friday’s sharp decline into the new week and is now back at 1.1925, meaning two-year highs just above 1.20 reached last week fade into a memory.

The dollar – a favorite in times of market jitters – is being bid on, pushing the exchange rate between the pound and the dollar back to 1.3498 in the process.

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Tensions between Ukraine and Russia are high, with Western countries warning citizens that an invasion is near and could happen at any moment.

The United Kingdom joined the United States and announced on Monday that it would withdraw staff from its embassy in Kyiv in recognition of growing fears.

Russia has nevertheless denied any plans for military action, although tens of thousands of soldiers have massed on the border.

“The threat of conflict erupting on the doorstep hangs over European indexes, as hopes begin to fade that there will be significant new moves by diplomats,” says Susannah Streeter, senior analyst Investments and Markets at Hargreaves Lansdown.

Looking ahead, another big risk to markets and the pound looms in the form of Wednesday’s Federal Reserve announcement.

The Fed should communicate clearly that interest rates will rise in March.

But, it is the indications of continued interest rates and quantitative tightening – the process by which quantitative easing is reversed – that will matter for markets.

“With markets already priced 100% for a 25bps rate hike in March and forecasting 4 hikes in 2022, we believe balance sheet runoff still needs to be factored in. Any clues regarding runoff to coming sooner and faster than the market currently expects is likely to keep pushing real rates higher,” says strategist Mark McCormick of TD Securities.

Any further shocks regarding future tight monetary conditions in the world’s largest economy could mean market sentiment suffers further.

If so, then the British pound is looking at a austere week of trading.

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Mark Haefele, Chief Investment Officer, UBS Global Wealth Management, takes a step back and takes a “broader” approach.

Haefele says that while a number of critical market factors are still changing, for longer-term investors, “we don’t think it’s a bad thing if market volatility takes away some of the air of the most speculative corners of the market”.

“It’s also not a bad thing if the current volatility means that some secular growth names are being offered at their best prices in months,” he adds.

UBS says we remain in an environment of very strong economic growth, which should continue to support cyclical and value sectors in the near term.

As such, the British Pound could simply see a short-term decline before a higher return in line with a more dominant long-term uptrend.

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