Sterling still positive versus dollar despite fading risk appetite

Data showed that British consumer prices rose at the fastest annual pace in nearly 30 years last month, reinforcing the chances that the BoE will raise interest rates for the third meeting in a row. Recently, sterling had steadied versus the greenback as investors took rising Russia-Ukraine tensions in stride to focus on relative UK-U.S. rate hike expectations, which they saw as pound-positive.

Sterling gave up some gains but remained in positive territory against a slightly weakening dollar on Monday while optimism about a diplomatic solution to the Russian-Ukraine standoff faded, dampening risk appetite.

The Kremlin said there were no concrete plans for a summit over Ukraine between Russian President Vladimir Putin and his U.S. counterpart Joe Biden, after the French president said the two leaders had agreed on a meeting in principle. The pound was up 0.15% against the dollar at $1.3608, not far off its highest level since Jan. 20 at $1.3643.

It was up 0.05% against the euro at 83.28 pence. "Because the markets are already very nervous due to high inflation, rising interest rates and upcoming rate hikes, the Ukraine-Russia conflict is temporarily acting as an amplifier of market movements," Moritz Paysen, a foreign exchange and rates analyst at Berenberg, said in a research note.

Activity in Britain's private sector picked up at the fastest pace since June 2021 this month, after supportive data releases for the pound last week. Data showed that British consumer prices rose at the fastest annual pace in nearly 30 years last month, reinforcing the chances that the BoE will raise interest rates for the third meeting in a row.

Recently, sterling had steadied versus the greenback as investors took rising Russia-Ukraine tensions in stride to focus on relative UK-U.S. rate hike expectations, which they saw as pound-positive. Money markets are currently pricing in a 65% chance for a 50-bps rate hike from the BoE in March compared with a 79.5% chance of a 25-bps hike by the U.S. Federal Reserve.

According to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday, the pound showed the first net long position since November. "Away from geopolitics, one of the most remarkable events this week could be the likely announcement today that those catching COVID in the UK will no longer have to legally self-isolate from later this week," Deutsche Bank analysts said.

But British Prime Minister Boris Johnson's "living with COVID" plan, involving scrapping coronavirus restrictions and cutting access to free tests, ran into difficulty just hours before he was due to launch it.

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