GBP/EUR looking for a foothold above 1.1806 Fallout from Ukraine atrocity poses upside risk Prompts renewed calls for Russian gas boycottGBP/EUR could see 1.1947 on EUR weaknessUpside limited by recently cautious BoE stance

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The Pound to Euro rate was hobbled further last week but may have scope to reverse some of its recent losses over the coming days if weekend reports of an atrocity in Ukraine lead European capitals to contemplate a Russian gas boycott, given its possible implications for the Euro.

Sterling fell close to one percent against the Euro during the week to Monday after Bank of England Governor Andrew Bailey called into question the market’s assumptions about the outlook for Bank Rate, and as the single currency staged a recovery of its own.

“The GBP/EUR outlook appears largely a monetary policy divergence story. It’s a narrative that is expected to be mildly supportive for the coming quarter. However, it now seems unlikely to be sufficient to see fresh cyclical highs,” says Paul Robson, EMEA head of G10 FX strategy at Natwest Markets.

“We see GBP/EUR risks fairly neutral over the next three months,” Robson and colleagues said in a briefing last week before reiterating a forecast for Sterling to trade around 1.20 against the Euro in three months.

The Euro notched up a hat-trick of gains last week amid hope that a peace agreement is near in Ukraine, although the rally may also have been aided by European Central Bank (ECB) policymakers suggesting that Frankfurt continues to keep all of its monetary policy options open for the months ahead.

Above: Pound to Euro exchange rate shown at daily intervals with Fibonacci retracements of April 2021 uptrend indicating various areas of technical support for Sterling, and shown alongside EUR/USD. Click image for closer inspection.

Sterling fell to lows of 1.1740 after BoE Governor Bailey suggested that financial markets may be overambitious in their assumptions about interest rates for later this year and that the commodity-induced squeeze on incomes would potentially act a partial substitute for some of the increases in Bank Rate that financial markets have generally taken as given for later this year.

“We expect the money market to retrace some of the BoE rate hikes forecast for this year. As long as the market retains the view that the ECB will be able to hike rates before the end of the year, the EUR is likely to hold its ground,” says Jane Foley, head of FX strategy at Rabobank,

“On that basis, we see scope for upside pressure in EUR/GBP in the coming months,” Foley wrote following a review of Rabobank’s Sterling forecasts last week, which envisage GBP/EUR still trading around 1.19 in three months.

The BoE’s latest commentary and guidance has left market-implied expectations for Bank Rate to reach 2% by year-end appearing excessive and triggered losses for many Sterling exchange rates.

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“EURGBP looks very low relative to rate differentials and the differential moves in German vs. UK yield curves are slowly placing upward pressure on EURGBP,” says Brent Donnelly, CEO at Spectra Markets.

“EURGBP could easily go to 0.87 [GBP/EUR to 1.1494] in the next month or two” Donnelly said in a market commentary on Thursday.

While uncertainty about the outlook for Bank Rate could persist as a headwind, some of the Pound-Euro rate’s most recent losses could be partially reversed this week if allegations of Russian atrocities in Ukraine lead to fresh volatility in energy markets.

That would be possible if the alleged civilian massacre in the reclaimed town of Bucha, Ukraine, foments further public or political pressure for a ban on the importation of Russian gas as part of any sanctions response.

Above: Pound to Euro exchange rate shown at weekly intervals with Fibonacci retracements of April 2021 and March 2020 uptrends indicating various areas of medium-term technical support for Sterling. Includes 55-week moving-average. Click image for closer inspection

While the federal government has resisted such calls, Germany’s defence minister did advocate on Sunday for a ban on Russian gas imports, which would be highly inflationary and likely damaging for the Eurozone economy.

“There is talk of women, children and the elderly being among the victims. We must relentlessly investigate these crimes committed by the Russian military,” German Chancellor Olaf Scholz said in a statement on Sunday.

To the extent that currency markets perceive an energy boycott to be a likely part of any sanctions package, the Euro could find itself vulnerable this week due to the Eurozone economy’s greater reliance on gas imports from Russia and greater susceptibility to market unease relating to Ukraine.

Ukraine will remain a prominent feature of the market agenda this week, which is devoid of major appointments for the Euro in terms of economic data but features speeches from BoE Governor Bailey, Deputy Governor Sir John Cunliffe and chief economist Huw Pill on Monday and Thursday.

“The pound did not follow other European currencies higher in the rally induced by peace-talk optimism, and is now suffering very little from market doubts about an imminent de-escalation," says Franceso Pesole, a strategist at ING.

“The EUR/GBP downtrend may continue in the coming days, and we think a return to 0.8300 [GBP/EUR: 1.2048] remains likely in the near term,” Pesole and colleagues said in a Friday note.