Who knows is the honest answer! War in Ukraine has dominated markets since February 24 and unfortunately, war, especially this one, can prove unpredictable. Obviously, currency markets have played to the euro area’s greater geographic and economic linkages to Russia and Ukraine. But the United Kingdom, despite Brexit, is still geographically and still economically tied to Europe.
At the time of writing, EUR/GBP has shed nearly 1.30% of its value since all-out war broke out in Ukraine. But the pair have also failed to make a sustained break below 0.82637, which is the bottom end of the long-held range I discussed back in February.
Interest rate markets in the United Kingdom, however, are woke to the potential for economic trouble ahead. Bank of England base rate expectations for the end of this year have been pared back to 1.5% versus a peak of 2.25% prior to the breakout of war.
Now everyone is second-guessing whether the Bank of England will really raise the base rate by 50 bps on 17 March or only 25 bps! Still, a lot can happen in terms of the war in Ukraine between now and then. The euro is already pricing in quite a bit of negative news, so if the conflict were concluded there is every possibility that ultimately proves positive for the currency.
