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Sterling falls on Ukraine fears, rate hike prospects

written by Bella Palmer

The pound was down 0.5% against the stronger dollar at $1.3498

Sterling fell against a stronger dollar in early trading on Monday as the possibility of war in Ukraine, along with the prospect of a Federal Reserve rate hike, gave investors reason to turn more risk-averse. Riskier currencies such as the Australian dollar struggled while the U.S. dollar, which is seen as a safe haven, strengthened.

Russia could invade Ukraine at any time and might create a surprise pretext for an attack, the United States said on Sunday. Hotter-than-expected U.S. inflation data last week also weighed on investor sentiment, as markets bet that the Federal Reserve will lift rates more than 160 basis points before the end of the year.

The pound was down 0.5% against the stronger dollar at $1.3498 at 0902 GMT, a one-week low. Versus the euro, it was steadier, at 83.785 pence per euro.

Speculators slightly reduced the size of their net short position on the pound versus the dollar in the week to Feb. 8, CFTC data showed.

Should markets move to price in more geopolitical risk, the cable may well break below the 1.3500-1.3600 range that has held since the start of February, wrote ING strategists in a client note. At the same time, we think that this week's data flow in the UK should continue to support Bank of England tightening expectations.

UK jobs and wages data is due on Tuesday, and inflation data for January is due on Wednesday, with retail sales data expected on Friday.

The pound has benefited in recent weeks from the Bank of England raising rates.

While there might be upside risks to the jobs and wages data, given the BoE is better positioned for these risks we expect a less volatile reaction to the UK data this week with Fed speculation and events in Ukraine perhaps more important influences, wrote Derek Halpenny, head of research at MUFG.


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