- EUR/GBP pulled back from its closing levels near 0.8400 last Friday to drop back to 0.8350 on Monday.
- The euro underperformed as Western nations tightened sanctions against Russia, sparking fears of retaliation and energy supply disruptions.
The EUR/GBP retraced lower from its closing levels near 0.8400 last Friday to drop back to 0.8350 on Monday, mainly as a result of geopolitically related euro weakness rather than sterling strength. The EU, along with its NATO allies, announced a series of new and tougher sanctions designed to topple the Russian economy over its ongoing invasion of Ukraine over the weekend. Amid fears that Russia may retaliate by halting energy exports to the EU, energy prices in the region have soared, raising fears that the eurozone economy could face stagflation in the near term. .
Fears of economic weakness have caused market participants to lower expectations of ECB tightening, resulting in a sharp drop in euro zone bond yields. That, plus the fact that the eurozone’s geographic proximity to the war in Ukraine probably explains the euro’s weakness on Monday. In fact, the currency sits at the bottom of the G10 performance chart for the day, while the British pound sits closer to the middle of the chart. Going forward, with EUR/GBP nearing the middle of recent 0.8300-0.8400 ranges, the outlook for the pair is likely to see more range-bound medium-term conditions.
Just as the Russo-Ukrainian war and associated Western sanctions against Russia and global commodity price dynamics damage the near-term prospects of the Eurozone economy, the same can be said for the UK. Even before the start of the war, economists already saw the UK economy in a weak position, with big tax and energy increases on the way in April. While the BoE is expected to continue short-term tightening in the coming months, expectations of economic weakness will only hamper expectations for the BoE’s terminal rate, which is ultimately GBP negative.
Going forward, geopolitics will continue to be top of mind this week, although there are also plenty of economic events on the calendar for traders to keep an eye on. Following Monday’s higher-than-expected Spanish inflation figures for February, attention will turn to German figures on Tuesday and then to aggregate Eurozone figures on Wednesday. On the other hand, there will be plenty of BoE speech to monitor, with traders interested in how policymakers are reacting to the latest geopolitical developments and how this affects the rate outlook.
Additional technical levels
Source: Fx Street
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