EUR/GBP rises above 0.8350 with markets eyeing possible Russian attack on Ukraine

• EUR/GBP pulled back above 0.8350 on Wednesday with risk appetite choked on fears of a full-scale Russian invasion of Ukraine.
• More dovish comments from BoE policymakers on Wednesday before the UK parliament’s TSC also hampered sterling’s cause.

Although trading conditions are calmer on Wednesday compared to the turmoil on Tuesday, the EUR/GBP continues to trade with a bullish bias and recently broke above the 0.8350 level, rising 0.25% on the day after Tuesday’s 0.3% rise. The market’s broader risk appetite remains choppy and the Russia/Ukraine crisis fueled headlines, with the latest reports that the US has warned Ukraine of Russia’s plans to launch an attack within 48 hours. hours. Given the sterling’s status as comparatively more risk sensitive against the euro, that suggests a continued bullish bias for the pair on Wednesday and perhaps for the rest of the week, it probably makes sense.

In that regard, the bulls are likely to target weekly highs at 0.8380 set on Tuesday and last week’s highs at 0.8400 just above. The dovish tone of the BoE’s comments, with policymakers speaking before the UK parliament’s Treasury Select Committee (TSC), on Wednesday has added further support to EUR/GBP. Governor Andrew Bailey said he viewed inflation risks to the upside, though they were still two-sided, and warned investors not to make too aggressive bets on future rate hikes.

Meanwhile, one of the BoE members who voted for a further 50 bps rate hike at this month’s policy meeting said the decision had been very balanced, while another (who also voted for 50 bps) said he now sees a “modest” tightening in the coming months. More recently, the BoE’s Silvana Tenreyro also spoke about a further “modest” tightening of policy. This might have been more supportive of EUR/GBP were it not for the fact that traders have started talking about how the Russia/Ukraine uncertainty is likely to lead the ECB to be a bit more dovish/cautious at the next meeting in March.

Looking ahead to the rest of the week, the central bank’s speech and economic data are likely to take a backseat to the topic of geopolitics in Eastern Europe. If US intelligence officials are correct and Russia mounts a full-scale invasion within 48 hours, that would probably be the biggest market event since the start of the pandemic. The question for the EUR/GBP would be whether it should spike higher to reflect lower risk appetite or lower to reflect the economic vulnerability of the Eurozone given its reliance on Russian energy imports.

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