FX UPDATE

Amid a number of turbulent weeks, the Pound to Euro exchange rate still managed to reach a post-EU referendum high at the start of the week. The key focus this week will be Thursday’s European Central Bank (ECB) policy decision. Affecting the pair is also the war between Russia and Ukraine.

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Last week, the British Pound was up by 1.2% against the Euro and has now hit 1.2190. Zach Pandl, co-head of global foreign exchange strategy at Goldman Sachs, explained, “While no statistical model can fully capture the impact of recent events, we can apply our existing tools to better understand the drivers of the FX moves.”

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As a result of the increase, oil and gas prices may also be up, creating a larger demand for the currency by net importers in Europe and the UK. Plandl continued, “In our view this suggests that EUR/USD and EUR/GBP are the most appropriate crosses for new hedges for Ukraine-related risks (EUR/CHF has been highly responsive to these developments to date but intervention risk has likely risen now).”

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“If Euro Area growth holds up reasonably well and the ECB remains on track to raise rates this year, we would still see a bullish structural outlook for the currency. For now we stay on the sidelines in EUR crosses while we await more clarity on the unfolding geopolitical crisis.”

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Moreover, the Euro/Dollar exchange rate is under pressure due to the escalating tension in Ukraine. On Monday, the EUR/USD pair was close to two-year lows and may continue to sink throughout the week.

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“The EUR has broken under 1.10 to now face limited support markers until psychological floors in the 1.09 and 1.08 zones. However, the currency’s move into oversold conditions on the RSI suggests the move to these levels is unlikely to occur in quick succession,” strategists said.?