Renewed Euro Selloff, Pound Rate Against Euro Posts New 5-Year High
Over the weekend, pressure for a ban on oil imports from Russia intensified, with the United States leading the effort to get a bank on Russian exports.
Although the United States is also looking to boost supplies from elsewhere, there has been another spike in energy prices, with Brent trading at 13-year highs. UK gas prices also jumped more than 60% at Monday’s market open before a correction.
Marshall Gittler, Head of Investment Research at BDSwiss Group, commented; “I don’t know what difference it makes – as far as I know Russian crude doesn’t trade anyway – but it shocked the market nonetheless.”
Soaring energy prices triggered a further deterioration in risk appetite with further losses in equity markets.
Britain’s FTSE 100 index fell to a 4-month low with Germany’s DAX index to a 16-month low.
Weaker risk appetite and defensive demand for the US dollar pushed the pound/dollar exchange rate (GBP/USD) to a low of 1.3155 and the weakest level since December 2020.
If EUR/USD slips, GBP/USD will be vulnerable to further selling.
However, the exchange rate between the pound and the euro (GBP/EUR) posted a new 5-year high around 1.2190 before a slight correction.
Euro slide continues
The euro came under renewed pressure with the euro-dollar exchange rate (EUR/USD) slipping to a 22-month low of 1.0825 before recovering slightly.
JP Morgan Remains Bearish on Euro Outlook; “The EUR now faces the most toxic mix of a further deterioration in its energy ToT, question marks over the security of energy supply, a sharp erosion in support rates.”
Unicredit also noted downside risks on EUR/USD; “We have therefore revised our forecast to allow for greater downside potential for this pair down to 1.07 by 2Q22 with risks still tilted to the downside.”
Bank of America added; “We remain cautious. EURUSD is now very close to our year-end forecast of 1.10, but the risks have clearly shifted to further downside.
Rabobank added; “We have revised our EUR/USD target sharply down to 1.06 one-month, although there is room for stabilization around 1.08 three-month.”
ANZ also has a bearish outlook; “This Euro weakness may continue, in the near term, and EUR/USD could possibly test 1.05 or lower as the conflict escalates.”
Goldman Sachs remains cautious about selling the euro at these levels; “Even if the fallout hurts the eurozone’s growth outlook, we are not sure that it would lead to a sustained depreciation of the euro, as the ECB could also worry about the implications for inflation, and policymakers could respond to the crisis with fiscal easing.”
ING noted the possibility for central banks to intervene to stabilize conditions; “If things were to get out of control, we would think that a coordinated intervention by the G5 to support EUR/USD would be more likely than an intervention on its own from the ECB. But that may only happen closer to the parity.
The British economic debate will intensify
Prior to the Ukraine crisis, there were already significant concerns about the impact of soaring energy prices on the UK economy, with a particular focus on consumer spending.
These fears will intensify given the renewed spike in energy prices, with Brent trading at a 13-year high.
Energy bills will rise by almost 50% next month and there will be renewed fears of another sharp rise in October.
ANZ added; “A weak euro will also add to inflationary pressures, as most commodities are denominated in US dollars.”
Shaun Osborne, Scotiabank’s Chief Foreign Exchange Strategist, commented; “The bank is very unlikely to rise 50 basis points as markets expected in mid-February (quotes are still around 20%), and it could even adopt a cautious tone that would increase the possibility of a hold in May as she assesses the indirect impact of the war on the British economy.”
According to ING; “EUR/GBP has now broken below major lows seen in 2019 and 2020 and is trying to recoup losses from the Brexit summer of 2016. Further GBP upside looks likely.”
Rabobank added; “Given the UK’s energy supplies are more diversified than Germany’s, we expect the GBP to remain moderately more resilient than the EUR and have also adjusted our EUR/GBP forecast lower to 0.81 over a month.” (1.23 for GBP/EUR).