Upside risks persist as ECB decision looms

  • GBP/EUR could hold above 1.20
  • Chart resistance at 1.2152 may erode
  • The ECB’s political decision could lead to a setback
  • If policy normalization remains on the table
  • But the conflict in Ukraine supports the GBP/EUR

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The exchange rate between the pound and the euro hit a new high after the EU referendum on Monday when it hit 1.2190 and the upside risks persist, the war in Ukraine and the political decision to with Thursday’s European Central Bank (ECB) being the immediate short-term drivers.

The pound rose 1.2% against the euro last week, its strongest gain since November, as continental European currencies felt the brunt of the market’s response to the continued bid and growing most destructive of Russia to impose itself on Ukraine.

This response has led to, among other things, significant increases in oil and gas prices which will act as an economic headwind and mean that more currencies will be sold into the market by net importers such as Europe and the UK, among others.

“While no statistical model can fully capture the impact of recent events, we can apply our existing tools to better understand the drivers of currency movements,” said Zach Pandl, co-head of global currency strategy at Goldman. Sachs.

“In our view, this suggests that EUR/USD and EUR/GBP are the most appropriate crosses for new Ukraine-related risk hedges (EUR/CHF has been very responsive to these developments so far). ‘now, but the risk of intervention has probably increased now),’ Pandl and his colleagues said in a Friday note.

GBP to EUR daily chart

Above: exchange rate between the pound and the euro shown at daily intervals.

  • Reference prices for publication:
    GBP to EUR: 1.2150
  • Current bank rates (indicative): 1.1826 – 1.1911
  • Rates of payment specialists (indicative): 1.2042 – 1.2090
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  • Set up an exchange rate alert, here

The pound-euro hit its highest since the immediate aftermath of the Brexit referendum last Friday before halting around 1.2148, coinciding with technical resistance at the 61.8% Fibonacci retracement of the downward trend induced by the 2016 referendum.

But that air barrier could erode this week if wholesale energy prices remain on the rise and continue to weigh on Europe’s single currency, which is widely seen as more exposed to any supply disruptions from Russia and to rising import bills.

“If Eurozone growth holds up reasonably well and the ECB remains on track to raise rates this year, we would still see a bullish structural outlook for the currency. For now, we remain on the sidelines. euro crosses pending further clarity on the ongoing geopolitical crisis,” Pandl and his colleagues also said.

While the side effects of the increasingly destructive conflict in Ukraine and the resulting humanitarian crisis have been a heavy burden for the euro so far, the financial and economic implications are highly inflationary and could still have implications for the ECB’s policy outlook that could be a headwind for Sterling on Thursday.

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“It seemed almost certain that the ECB was preparing markets for a sharp change in outlook ahead at the March meeting. Markets started pricing in price increases this year, but the situation in Ukraine changed the calculus” , says Neil Wilson, chief market analyst at

Financial markets had expected the ECB to stop buying European government bonds and raise its deposit rate from -0.5% to 0% this year before Russian military forces entered Ukraine, but have since greatly reduced these expectations; weighing on the euro along the way.

This could have been a mistake, however, given that inflation has risen further since the February meeting, when the ECB had already clearly acknowledged the growing upside risks to the outlook from price pressures, which are likely to remain on an upward trajectory because of the attack on Ukraine. .

“We also believe that the ECB’s updated economic projections may signal greater confidence in the positive impact of the crisis on inflation than its negative economic impact. In turn, this may be interpreted by markets as less accommodative and can therefore limit further losses in EUR,” says Valentin Marinov, head of FX research at Crédit Agricole CIB.

GBP to EUR weekly chart

Above: The Pound’s exchange rate against the Euro is shown at weekly intervals, with Fibonacci retracements of the Referendum drop indicating likely areas of technical resistance for the Pound. Click on the image for a closer inspection.

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If the inflationary impact of events in Ukraine brings the Governing Council of the ECB closer to the conclusion that its symmetric 2% target could be achieved in a sustainable manner without the need for “the accommodative impact of interest rates policymakers be strengthened” by quantitative easing, this would likely revive and reinforce market expectations for an interest rate hike later in 2022.

This in turn would potentially place a floor under the single currency and limit the exchange rate between the Pound and the Euro encouraging sentiment and speculative bets such as below.

“As the market continues to unpack the complexities and uncertainties of rising geopolitical tensions, we believe it has overlooked four critical macro factors between the EUR and GBP: growth, inflation, rate pricing terminals and valuations,” said Mark McCormick, global head. of FX strategy at TD Securities, writing in a research briefing on Friday.

“In terms of growth, while the Eurozone has more direct Russian trade exposure, the UK has closer links to financial markets through banks and assets. When it comes to inflation, our factor indicates higher pressures on the Eurozone, although this will require some interest from the ECB. Even so, we note the divergence between EURGBP and ECB/BOE terminal prices, which have moved in favor of the Euro” , said McCormick and his colleagues.

TD Securities suggested last week that the bank’s clients should sell the pound sterling at 1.2113 and buy the EUR/GBP exchange rate around 0.8255 as McCormick and his colleagues anticipate a drop towards 1.1627 during the next few weeks.

However, they would walk away from the trade if the pound rises to 1.2468 rather than falling.


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