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Pound Euro (GBP/EUR) Exchange Rate to Trend Higher on USD Strength?

Pound Euro Exchange Rate Firms on Escalating Geopolitical Tensions

The Pound Euro (GBP/EUR) exchange rate is inching higher this morning ahead of this afternoon’s speech from European Central Bank (ECB) policymaker Philip Lane. Renewed risk aversion is lending strength to the US Dollar (USD), which in turn weighs upon the single currency.

At the time of writing, GBP/EUR is trading at €1.1957, up slightly from today’s opening levels.

Euro (EUR) to Dip as USD Gains in Strength?

The Euro (EUR) is facing headwinds today as fresh risk-off sentiment buoys the safe-haven US Dollar, applying EUR downside.

The Organization for Security and Co-operation (OSCE) in Europe reported multiple shelling incidents along the line of contact in East Ukraine in the late Asian trading session: according to the Ukrainian military, Russian-occupying forces fired on village in Luhansk region.

Further investigation suggests that the incident occurred within the contested area of Donbas, reducing alarm somewhat. Furthermore, a US satellite image company has revealed that Russia pulled back some equipment from near Ukraine.

All the same, market sentiment remains cautious.

Potentially applying some upside ahead, this morning’s economic bulletin confirmed that the ECB’s Governing Council stands ready to adjust all of its instruments to ensure that inflation stabilises at the 2% over the medium term. If policymaker Lane follows this release with hawkish rhetoric, the Euro may firm against its peers.

Pound (GBP) to Firm against Risk-On Peers?

The Pound (GBP) is enjoying broad-based strength this morning as a turnaround in risk sentiment subdues Sterling’s risk-on peers.

Also buoying GBP are Tuesday’s UK wage growth figures and hotter-than-expected UK inflation figures, released yesterday. Although December’s real wages fell against the pace of inflation, estimates are more optimistic for January: the Office for National Statistics (ONS) predicted that year-on-year median monthly pay will increase by 6.3%.

Meanwhile, the UK CPI lifted expectations for a 50 bps rate hike at March’s meeting of the Monetary Policy Committee (MPC). The UK’s annual inflation rate climbed for the 13th month to its highest level in almost 30 years, coming in at 5.5% in January.

If risk sentiment remains bearish, the Pound may continue to gain against perceived-riskier peers; on the other hand, concerns over UK exports could exert downside following a survey conducted by the British Chambers of Commerce (BCC).

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