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Sterling falls to 2-month low versus dollar, biggest drop since March 2020

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

By Stefano Rebaudo

(Reuters) -Sterling fell to its lowest this month against the dollar and was set for its worst day since November on Thursday as investors rushed into safe-haven assets after Russia launched an all-out invasion of Ukraine.

NATO said on Thursday it would take additional steps to strengthen the alliance’s deterrence and defence after Russia’s action.

Safe-haven currencies such as the yen and U.S. dollar were in demand, while riskier currencies, including sterling, tanked.

The pound fell 1.1%, its biggest daily decline since November, to $1.3418, its lowest this month.

It was up 0.05% versus the euro at 83.39 pence in choppy trade.

The narrative about future interest rates was still in focus, with investors’ views mixed ahead of more Bank of England (BoE) speakers scheduled for later in the day.

BoE Chief Economist Huw Pill provided another dovish comment on Thursday by saying the central bank would seek to bring fast-rising inflation down in a “measured way” and one “that doesn’t disturb the rest of the economy.”

MUFG analysts argued “the (Ukraine) conflict is likely to encourage market participants to scale back expectations for monetary tightening from major central banks in the near-term.”

“We would expect the UK and U.S. rate markets to continue to adjust expectations more in favour of smaller 0.25 point hikes being delivered at their next meetings in March,” they added.

Money markets are currently pricing in a 55% chance of a 50 basis point (bp) rate hike from the BoE in March and fully pricing a rate increase of 130 bps by year-end.

“We doubt they (BoE officials) will want to further push back on aggressive pricing of the BoE cycle, which is providing support to GBP and helping to insulate against higher energy prices,” ING analysts said.

The UK rate market had already scaled back expectations in recent days for a 0.50 point hike following less hawkish comments from BoE Monetary Policy Committee officials.

BoE Governor Andrew Bailey said on Wednesday that markets should not get carried away about the likely scale of interest rate rises, while policymaker Silvana Tenreyro said she saw the case for further modest tightening.

Sterling set for biggest daily fall since November vs dollar

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