Above: Russian President Putin addresses the nation. Image: Kremlin.ru.

The Pound to Euro exchange rate has risen back above 1.20 and is approaching 2022 highs following developments concerning Russia and Ukraine overnight.

Russia sent troops into eastern regions of Ukraine overnight in what political analysts say amounts to a de facto invasion and significantly increases tensions in the region.

The move followed a formal recognition by Russia of the separatist eastern Ukraine regions of Donetsk and Luhansk which in effect violates the Minsk agreement.

The moves were announced in an an hour-long address to the nation by Russian President Vladimir Putin, who also said he did not recognise the integrity of the Ukrainian state.

Ukraine's Ambassador to the UK Vadym Prystaiko told BBC Newsnight: "I was listening to Putin for almost an hour, an historic debate with himself. And I have to tell you when a nuclear nation is calling your nation a historical mistake which has to be fixed, you have to be worried about what he has in mind."

"In parts his speech might have been slightly incoherent. However, it became clear that principally the Russian President does not grant Ukraine the right of statehood. There may be observers who will downplay this as the necessary whipping in of the Russian public. I would urge caution. History teaches us that often it is wiser to take the announced aims of aggressors seriously," says Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

Above: GBP/EUR at four-hour intervals.

Reference rates at publication:

GBP to EUR: 1.2008High street bank rates (indicative): 1.1688 - 1.1772Payment specialist rates (indicative): 1.1900- 1.1948Find out more about specialist rates and service, hereSet up an exchange rate alert, hereWestern Nations including the UK were quick to denounce the moves and said they were to sanction Russia.

Investors will be interested in the scope and scale of the sanctions: severe sanctions would almost certainly impact the supply of Russian gas and oil to the global economy which could place significant pressure on the global economic recovery.

In particular, Europe which relies heavily on Russian gas, would be exposed to significant headwinds.

It is for this reason that the Euro is seen to be struggling in the current climate.

"I am sure I do not need to mention that within the G10 universe the euro is likely to be one of the losers with the franc and the yen being the winners, do I?" says Leuchtmann.

The GBP/EUR exchange rate rose to a high of 1.2030 (EUR/GBP down to 0.8312) on Tuesday while the EUR/USD exchange rate was lower at 1.1298.

"Despite the pound being generally a more sensitive currency to swings in risk sentiment compared to the euro, EUR/GBP has been depreciating quite steadily as tensions in Ukraine have flared up," says Francesco Pesole, FX Strategist at ING Bank.

But reports suggest an initial tranche of sanctions from the UK, U.S. and European Union would be relatively constrained as Western countries look to retain options in the event of a full blown multi-front invasion of Ukraine.

"Western sanctions on the more forceful end plus a spiral of sanctions and counter-sanctions appears to be a more likely scenario over the coming weeks – regardless of what the West will announce now as far as immediate sanctions are concerned (which I expect to be light)," says Leuchtmann.

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This is a fast moving situation that should keep markets and the Euro volatile in the near-term.

Any further significant deterioration could weigh on the Euro and help GBP/EUR back to 2022 highs and even beyond.

But should Putin show restraint going forward, signalling that the annexing of the two breakaway regions are the extent of his near-term ambitions, the Euro could recover.

"By taking the decision to escalate, Putin has not only massively reduced the possibility of a negotiated solution. He has also given an indication of his aims in this conflict," says Leuchtmann.

The Commerzbank currency analyst says he expects further escalation as being likely.

"It now has to be assumed that instead there is a risk that large parts or all of Ukraine is going to be occupied. It would fit in much better with a scenario of this nature that Russian troops remained in Belarus," says Leuchtmann.

Ukraine has effectively been at war with rebels in Eastern Ukraine since 2014 with skirmishes occurring on a daily basis on the borders of Luhansk and Donetsk.

The risk now is that Russia recognises any further skirmishes as an attack on another sovereign nation by Ukraine, offering a further pretext to a full-blown invasion and a march on Kyiv.

"Markets may start to materially price in a fully-fledged invasion of Ukraine after Russia officially recognised Eastern-Ukraine separatists and moved troops to the region," says Pesole.

"Acknowledging the high volatility and unpredictability of the situation – we think upside risks should prevail for safe-haven currencies (US dollar, Japanese yen and Swiss franc) while European high-beta currencies (like Norway's krone and Sweden's krona) should remain the most vulnerable in a generally fragile pro-cyclical FX segment," he adds.