• EUR/GBP reversed lower from its near-0.8400 closing levels last Friday to fall back into the mid-0.8300s on Monday.
  • The euro underperformed as Western nations toughened sanctions against Russia, sparking fears of retaliation and energy supply disruptions.

EUR/GBP reversed lower from its near-0.8400 closing levels last Friday to fall back into the mid-0.8300s on Monday, predominantly as a result of geopolitics related euro weakness rather than sterling strength. The EU in conjunction with its NATO allies announced a raft of new, harsher sanctions designed to topple to Russian economy for its ongoing invasion of Ukraine over the weekend. Amid fears that Russia might retaliate by halting energy exports to the EU, energy prices in the region have spiked, triggering fears that the Eurozone economy might face near-term stagflation.  

Fears of economic weakness have seen market participants reduce ECB tightening expectations, resulting in a sharp drop in Eurozone bond yields. That, plus the fact that the Eurozone’s geographic proximity to the war in Ukraine, likely explains euro weakness on Monday. Indeed, the currency sits at the bottom of the G10 performance table for the day, while sterling sits nearer to the middle of the table. Ahead, with EUR/GBP sat close to the middle of recent 0.8300-0.8400ish ranges, the outlook for the pair is likely for more rangebound medium-term conditions.

Just as the Russo-Ukraine war and associate West vs Russia sanctions and global commodity price dynamics damage the near-term outlook for the Eurozone economy, the same can be said for the UK. Even prior to start of the war, economists already saw the UK economy as on a weak footing, with large tax and energy hikes on the way in April. While the BoE is very much expected to continue with near-term tightening in the coming months, expectations for economic weakness will only hamper expectations for the BoE’s terminal rate, which is ultimately a GBP negative.

Ahead, geopolitics is set to remain front of mind this week, though there are also plenty of calendar economic events for traders to keep an eye on. Following Monday’s hotter than expected Spanish inflation figures for February, focus will be on German numbers on Tuesday then Eurozone aggregate figures on Wednesday. Across the channel, there will be plenty of BoE speak to monitor, with traders interested as to how policymakers react to the latest geopolitical developments and how this affects the rate outlook.

This article was originally published by Fxstreet.com.Read the original article here.

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