Russia-Ukraine: Euro Recoups Losses against Pound and Dollar on Signs of Easing Tensions

• GBP/EUR up on Ukraine tensions
• But USD an all-round winner
• Fortunes would flip on diplomatic solution
• EUR set to gain says Barclays
• HSBC disagree

Above: File image of Ukrainian soldiers under inspection. Image © Adobe Stock.

The Euro was seen recouping losses against the Dollar and British Pound on Tuesday amidst signs tensions in Eastern Europe might be easing.

While the situation on the Ukraine-Russia border remains tense, reports that Russia was sending some troops "back to base" were attributed to a recovery in investor sentiment, which in turn aided the Euro.

The Interfax news wire reports on Tuesday that units of Russia's Western and Southern Military Districts are heading back to base by rail and by truck at the conclusion of their training, citing the Russian Defense Ministry.

"Units of the Southern and Western Military Districts, which have accomplished their missions, are boarding trains and trucks and will head for their garrisons later today. Some units will join military convoys and will perform self-propelled marches," Russian Defense Ministry spokesman Igor Konashenkov told the newswire.

The headlines were picked up on by financial market participants who suggested tensions were easing somewhat.

"This seems to be helping risk catch some more bid in early trade….shows risks of trading headlines and shows market sensitivity to the situation over there. Far from clear what is going on – beware," says Neil Wilson, Chief Market Analyst at Markets.com.

"Any sign of the crisis finding a diplomatic resolution could help the euro resume its ECB-inspired ascent," says Joe Manimbo, Senior Analyst at Western Union's Manimbo.

Above: GBP/EUR (top) is paring recent gains while GBP/USD (bottom) is recovering some losses on recent developments concerning Russia and Ukraine.

• Reference rates at publication:
  Pound to Euro: 1.1946 \ Pound to Dollar: 1.3554
• High street bank rates (indicative): 1.1718 \ 1.3250
• Payment specialist rates (indicative): 1.1893 \ 1.3462
• Find out more about specialist rates and service, here
• Set up an exchange rate alert, here

The Pound has this week rallied against the Euro but fallen against the Dollar amidst a rise in investor anxiety linked to Russia-Ukraine tensions; a currency reaction that is testament to the European Union's heavy dependence on energy imports from Russia.

"The European Union would also suffer sizeable consequences, given that Russian energy accounts for nearly 40% of its gas imports and 30% of its oil imports," says Mark Haefele, Chief Investment Officer Global Wealth Management, at UBS AG.

The situation is tense as by Monday there were estimated to be 100 Russian battalion tactical groups massed within striking distance of Ukraine, amounting to 60% of Russia’s ground combat power, according to western estimates.

Amidst the developments the Pound to Euro exchange rate has rallied back above 1.19 while the Euro to Dollar exchange rate has fallen back to close to 1.13.

"The euro came under heavy fire as traders priced in the collateral damage from a potential conflict at the Eurozone’s doorstep and the spillover effects from spiralling energy prices. This is already a huge problem in Europe as consumers are being squeezed by rising electricity bills," says Marios Hadjikyriacos, Senior Investment Analyst at XM.com.

The Dollar was however bid against both the Pound and Euro, courtesy of the safety credentials embodied by the world's largest and most liquid financial asset.

"The safe haven greenback rose to its highest in at least a week against the euro, sterling, and Canadian dollar," says Manimbo.

The Pound to Dollar rate nevertheless continues to respect a tight range in February, not closing outside of 1.36-1.35 since January 31.

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Last week foreign exchange markets were highly reactive to global inflation trends and associated central bank policy expectations, but this focus has since shifted onto geopolitics.

The Euro, Dollar and Pound will therefore continue to exhibit the aforementioned risk dynamics as long as fears concerning a Russian invasion into Ukraine persist.

"The risk of a war in Ukraine should really worry EUR/USD traders," says Jeremy Boulton, a Reuters market analyst. "The Dollar is global reserve currency. Where cash heads in a crisis".Boulton says there is a "good correlation between EUR/USD and energy prices," as the Eurozone relies on oil imports.

"Should the crisis deteriorate further, the single currency would weaken more," says Asmara Jamaleh, an economist with Intesa Sanpaolo.

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Russia on Monday committed to further talks with Western nations, suggesting the country was looking for a diplomatic win.

Foreign minister Sergei Lavrov told President Vladimir Putin in a televised meeting that talks should continue as "there’s always a chance," of progress.

Boris Johnson and President Biden have meanwhile agreed there remains a "crucial window" to avoid a Russian invasion of Ukraine as Moscow hints that it is still open to a diplomatic solution.

The assessment comes after a lengthy call between the two leaders on Monday night.

Expecting tensions to ease, foreign exchange strategists at Barclays are buyers of the Euro, anticipating multi-week recovery in response to the ECB's recent signal that it could consider raising interest rates in 2022.

"We view this as the consolidation before the rally," says Marek Raczko, an analyst at Barclays.

Barclays' analysts note ECB members are now talking about policy normalisation after a decade of policy being biased to protect against deflation.

The ECB at their February policy update officially acknowledged "upside" inflation risks and set out a policy path to normalising rates.

"This is a seismic shift in the ECB's reaction function and it will take several months for FX markets to adjust," says Raczko.

Barclays are buyers of the Euro, targeting a rally in Euro-Dollar to 1.20.

Intesa Sanpaolo's Jamaleh says medium-term downside for the Euro seems limited, "barring a further significant deterioration of the Ukrainian crisis."

He says signals of an acceleration of the ECB's "policy adjustment path" may result in an initial interest rate hike at the end of the year which could offer the Euro some support going forward.

If geopolitical tensions fade and investors return focus to central bank policy then Euro exchange rates could snap back to recent highs and put the Pound and Dollar back under pressure.

However, a note from researchers at HSBC out on Monday shows they don't agree with a view that a "seismic shift" has occurred at the ECB and that they expect the Euro to continue to struggle.

"A hawkish shift in ECB rhetoric is not a 'shock and awe' moment for the EUR, where terminal rates remain lower than elsewhere in G10," says Paul Mackel, Global Head of FX Research at HSBC.

"It is clear that the market is re-thinking about the ECB and the outlook for the EUR. We agree that there is more two-way risk but also see the EUR succumbing to gravity eventually. There is shock and awe and then there is shock and dismay. For now, we side with the latter on the EUR," he adds.