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The British Pound would remain under pressure against the Euro, Dollar and other major currencies in a new phase of market decline linked to the ongoing war in Ukraine and associated economic sanctions say currency analysts.

According to Commerzbank FX Analyst Antje Praefcke the market has reached "a new escalation level and has therefore entered a new risk-off phase" as global equity markets register fresh losses.

The key Pound-Euro and Pound-Dollar exchange rates are traditionally positively correlated to global investor sentiment and any protracted period of market underperformance therefore bodes for further weakness in these pairs.

"GBP has an apparent fixation on risk appetite, often outshining rate differentials as a consideration despite the market’s fixation on monetary policy signals," says Daragh Maher, Head of Research, Americas, at HSBC..

Global stock markets are widely trading in the red on April 07 amidst another episode of market nerves.

"In my view the conflict seems to have reached a new escalation level, from a military and economic point of view. The West is reacting to horrific events in Ukraine with new sanctions," says Praefcke. "This new round of sanctions in turn increases the risks on the markets."

In addition, the analyst expresses concern that markets will be weighed by ongoing fears of an energy crisis and a Russian default on its sovereign bond payments.

The Pound to Euro exchange rate is trading in the middle of its 2022 range at 1.1985 while the Pound to Dollar exchange rate is looking vulnerable to further losses at 1.3080.

"Stock markets are under pressure, as are the currencies which are particularly exposed to the risks, such as the euro or the Eastern European currencies. After all, the European economy would be particularly affected by the energy crisis," says Praefcke.

"It is clear that risk appetite is at the heart of much of G10 FX," says Maher, referencing a recent study by HSBC which finds risk appetite remains a dominant driver for Sterling.

"There are signs RORO’s grip may be strengthening again," adds Maher. "This suggests for all the fixation on the Bank of England and what might happen to interest rates, the currency market may be more concerned about what is happening to global risk appetite, notably around evolving geopolitical developments". (RORO = Risk on / Risk off).

Pound Sterling Live has consistently noted the Pound to have struggled against major peers during this period of conflict in Ukraine as the war contributes to surging inflation and expectations for weaker domestic growth.

The UK joined the U.S. in imposing new sanctions on Russia midweek, with the UK saying its fifth package of sanctions includes a full asset freeze on Russia's largest bank.

Sberbank is Russia’s largest bank and this freeze is being taken in co-ordination with the U.S.

Above: GBP/EUR (top) and GBP/USD (bottom) at daily intervals.

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The UK also said it would put an end to all new outward investment into Russia; in 2020 UK investment in Russia was worth over £11BN.

The UK also committed further to ending all imports of Russian coal and oil by end of 2022 and commits to end imports of gas as soon as possible thereafter. From next week, the export of key oil refining equipment and catalysts will also be banned.

The UK said it would now ban imports of iron and steel products, a key source of revenue to the Russian government.

But the moves will exacerbate the current global commodity squeeze the UK and other western nations are under, promising to sustain elevated inflation that will inevitably eat into economic growth.

The Bank of England recently presented estimates of the impacts on GDP and inflation of a 10% lift in energy prices for the UK, Europe and the US.

On the BoE’s calculations the impacts are largest for Europe, lifting CPI inflation by about 0.6 percentage points and cutting GDP by 0.3 percentage points.

"The impacts on the UK are a little smaller, but still much larger than for the US," says analyst Kristina Clifton at Commonwealth Bank of Australia. "These calculations highlight why the US dollar has strengthened against both the EUR and the GBP since the war saw energy prices ramp up".

The European Union is meanwhile also expected to announce further sanctions, but the all-important Russian energy sector is unlikely to be targeted in recognition of the bloc's ongoing reliance on oil, gas and coal from Russia.

"I suspect that with each new escalation level we will see renewed waves of risk aversion. And unfortunately, there seems to be no end in sight," says Praefcke.

"The U.S. and the U.K. have already imposed new sanctions, the EU is still looking for agreement, but is planning a coal embargo. This would at least be a start toward a total embargo of Russian energy," she adds.

Foreign exchange analysts at Bank of America meanwhile say their medium-term bearish views on the British Pound remains unchanged, although they now see the UK currency being better supported against the Euro.

Bank of America analyst Kamal Sharma notes the Pound has historically traded negatively during periods of risk aversion and this should keep it under pressure.

But "risk resides with EUR," says Sharma, "markets believe the first order burden of impact of the Ukraine conflict will be on the European economy and the spike in EUR-centric risk premium is comparable to those during the EZ Sovereign Debt crises."

Bank of America holds a year-end Pound-Dollar forecast of 1.24, but have lowered their EUR/GBP forecast from 0.89 to 0.85 in recognition of the Euro's particular vulnerability to the war.

(EUR/GBP at 0.89 gives a GBP/EUR rate of 1.1236 while EUR/GBP at 0.85 = 1.1765).