Pound hits one-week low as Ukraine fears hurt riskier currencies

© Reuters. FILE PHOTO: Pound and U.S. dollar banknotes are seen in this illustration taken January 6, 2020. REUTERS/Dado Ruvic

By Elizabeth Howcroft

LONDON -Sterling fell to a one-week low against a stronger dollar on Monday as the possibility of war in Ukraine, along with the prospect of a Federal Reserve rate hike, gave investors reason to turn more risk-averse.

Riskier currencies such as the Australian dollar struggled while the U.S. dollar, which is seen as a safe-haven, strengthened.

The United States said on Sunday that Russia could invade Ukraine at any time and might create a surprise pretext for an attack. Russia has denied having any such plans.

Hotter-than-expected U.S. inflation data last week also weighed on investor sentiment, as markets bet the Federal Reserve will lift rates more than 160 basis points before the end of the year.

The pound was down 0.4% against the stronger dollar at $1.3512 at 1658 GMT, having earlier hit a one-week low of $1.3495.

Versus the euro, it was slightly higher, at 83.655 pence per euro.

British two-year government bond yields climbed again to hit their highest in nearly 11 years.

Speculators slightly reduced the size of their net short position on the pound (bets that the pound will fall) versus the dollar in the week to Feb. 8, CFTC data showed.

“Should markets move to price in more geopolitical risk, cable may well break below the 1.3500-1.3600 range that has held since the start of February,” ING strategists wrote in a client note.

“At the same time, we think that this week’s data flow in the UK should continue to support Bank of England tightening expectations.”

UK jobs and wages data is due on Tuesday, and inflation data for January is due on Wednesday, with retail sales data expected on Friday.

“At the moment, all signs point to more persistent inflationary pressures,” Deutsche Bank (DE:DBKGn) senior economist Sanjay Raja wrote.

The pound has benefited in recent weeks from the Bank of England raising rates.

“While there might be upside risks to the jobs and wages data, given the BoE is better positioned for these risks we expect a less volatile reaction to the UK data this week with Fed speculation and events in Ukraine perhaps more important influences,” Derek Halpenny, head of research at MUFG, wrote.