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Sterling falls amid Ukraine tensions, BoE's cautious view

Sterling edges lower as Ukraine tensions intensify
Sterling edges lower as Ukraine tensions intensify   -   Copyright  Thomson Reuters 2022
By Reuters

By Lucy Raitano

LONDON -Sterling fell to a six-day low against the dollar and euro on Tuesday with investors cautious on the British currency amid the Russia-West stand-off over Ukraine.

Also weighing on the pound, Bank of England (BoE) Deputy Governor Dave Ramsden on Tuesday signalled more monetary tightening, but said he now sees a “modest” rate hike over the coming months.

News on Monday evening that Russian President Vladimir Putin ordered troops into two breakaway regions of eastern Ukraine has increased geopolitical tensions and led to British PM Boris Johnson announcing fresh sanctions on Russia on Tuesday.

But the pound’s drop against the euro was compounded after the single currency strengthened earlier in the day on headlines that a Kremlin spokesperson said Moscow remained open to diplomacy.

After hovering around an almost three-week high against the euro, the pound weakened 0.5% to 83.58 pence by 1537 GMT. It also fell 0.3% against the dollar to $1.3563, after touching its lowest level against the greenback since Feb. 16..

According to analysts at ING, good UK data and bets the BoE will continue to raise rates have capped sterling falls, while the geopolitical backdrop is weighing on the single currency to a greater degree than on sterling.

“Markets are likely estimating a greater fallout from a collapse in diplomatic relationships with Russia for the eurozone than for the UK,” the ING analysts said in a research note on Tuesday.

The BoE raised interest rates to 0.5% this month from 0.25%, with Ramsden part of a minority who then voted for a bigger increase to 0.75%.

“Ramsden cautioned that current market pricing for rate hikes would leave inflation below target in two years — echoing the warning from the Bank at this month’s meeting that markets are too aggressively priced for policy tightening,” Shaun Osborne, chief currency strategist at Scotiabank, told clients.

Investors are fully pricing in another 0.25% rate hike at the BoE’s next scheduled meeting on March 17.