The Pound Euro exchange rate roared higher this week, with the pairing striking its best levels since the Brexit referendum. 

Euro plunges as Ukraine crisis sparks concerns over European energy security 

A clear Euro selling bias prevailed this week amidst considerable concern over the war between Russia and Ukraine and the potential knock-on impact on the Eurozone economy. 

EUR investors were particularly concerned about the potential for Russia to retaliate against the ratcheting up of Western powers by disrupting European energy supplies. 

Also weighing on the Euro was a further scaling back of European Central Bank (ECB) rate hike expectations, with most EUR investors now appearing to discount the chances of the bank raising interest rates in 2022, in spite of the Eurozone’s consumer price index reporting inflation the bloc rocketed to a record high of 5.8%.  

News of a fire breaking out at Ukraine’s largest nuclear power plant in the wake of Russian shelling, then extended the single currency’s losses and propelled the GBP/EUR exchange rate to €1.21 for the first time since the Brexit referendum. 

At the same time, while it fared well against a weakened Euro, the Pound was unable to replicate this success against the rest of its peers as the war in Ukraine also raised concerns in the UK, with GBP investors fearing the conflict will stoke inflationary pressures and further exacerbate the country’s cost-of-living crisis. 

Ukraine crisis set to continue to dominate market movement 

Turning to next week it seems safe to assume the war in Ukraine will continue to dominate movement in the GBP/EUR exchange rate. 

The Euro is likely to remain highly sensitive to developments in Eastern Europe. If the situation continues to deteriorate then the single currency is likely to extend its losing streak, particularly if the EU or Russia move to restrict oil and gas exports. 

Otherwise, the focus for EUR investors will be on the ECB’s latest policy meeting. This could reinforce any EUR selling pressure as the bank is likely to revert to a more dovish outlook in light of the current risks posed by the war in Ukraine. 

Meanwhile the publication of the UK’s latest GDP figures could provide some support to the Pound next week as January’s figures are forecast to report a rebound in economic growth as Covid restrictions were lifted. 

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