GBP/USD hits 2022 low as Russia turns back clockRisk aversion just one side of a multifaceted storyCBR’s defence of RUB & UK sanctions also relevantScope for GBP/RUB to reach all-time highs of 133+

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The Pound to Dollar rate slumped on Thursday as Moscow persisted with an attempted conquest of Ukraine and in the process exposed Sterling to the crossfire of efforts to keep the Rouble from losing a de facto global market referendum on preservation of the rules-based international order.

Pound Sterling fell more than one percent against the Dollar Thursday after Ukrainian borders with Russia and Belarus were overrun by a large military force in an act of sovereign state aggression reminiscent of an era that was once widely thought to have been consigned to the history books.

“For the broad USD, one of the most important aspects of today's trading session is that the currency has rallied in spite of the OIS curve paring back Fed rate hike expectations. We are observing a purely 'riskoff' dominated FX market with an understandable geographical separation between North America and Europe,” says Stephen Gallo, European head of FX strategy at BMO Capital Markets.

Dollar exchange rates were higher across the board on Thursday as stock markets sustained their heaviest losses since the onset of the coronavirus crisis, while oil and energy prices rose strongly and Sterling fell against almost all of its G10 counterparts.

Above: Pound-Dollar rate shown at daily intervals alongside GBP/RUB.

GBP/USD reference rates at publication:

Spot: 1.3350High street bank rates (indicative band): 1.2983-1.3076Payment specialist rates (indicative band): 1.3230-1.3280Find out about specialist rates and service, hereSet up an exchange rate alert, hereGBP/USD would typically be expected to fall in times of global market turbulence and, despite being uncharacteristic, Sterling’s losses against currencies like the New Zealand, Australian and Canadian Dollars are a rational response by the market given the UK’s economic exposure to conflict in Europe.

Nonetheless, there is also the possibility, if not likelihood, of Sterling having been caught in the crossfire as the Central Bank of Russia (CBR) sold down its foreign exchange reserves in a bid to keep the Rouble from falling into an abyss.

The Rouble was drubbed Thursday in what is in some respects a de facto global market referendum on whether to preserve the oft-cited “rules-based international order,” which has for decades sought to avoid acts of war and aggression between sovereign states.

“To stabilise the situation in the financial market, the Bank of Russia has decided to start interventions in the foreign exchange market, extend the Lombard List, and provide the banking sector with extra liquidity today,” the CBR said in a Thursday statement.

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These efforts to prop up a spiralling Rouble are especially relevant in light of the UK government’s prominence in the earlier international response to a multi-month intimidation and preparation campaign that saw Russian forces massing along the border with Ukraine.

“The response from the EU and US will not focus on a military response, but on driving a liquidity squeeze as much as possible on Russia to target their ability to finance the military. This means we will likely continue to see very illiquid markets in anything seen as even tangentially related to Russia until investors can assess the full spillover effects of those sanctions,” says Richard Kelly, head of global strategy at TD Securities.

The UK government response has previously seen Prime Minister Boris Johnson warn that he could seek to prevent Russia and companies domiciled there from dealing in Pound Sterling, which would have implications for the Central Bank of Russia.

While one of its smaller holdings, Sterling did still account for 5.9% of Russia’s $497BN basket of foreign exchange reserves at the last disclosure and in light of London’s threatened sanctions, it’s possible that these holdings would be among the first to be sold in CBR attempts to support the Rouble.

Above: Pound-Dollar rate shown at weekly intervals with Fibonacci retracements of 2020 rally indicating likely areas of technical support for Sterling.

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“Given that the Central Bank sits on $640bn in reserves (mostly denominated in EUR), this may have limited the amount of ruble weakness seen so far. However, following the Crimea annexation in 2014, the ruble weakened over 100%. Since then, Russia has learned to live under sanctions,but we believe that under the right circumstances USDRUB above 100 could be well within reach,” TD Securities’ Kelly wrote in a Thursday briefing to clients.

The CBR’s foreign exchange reserves are the fourth largest in the world, although they are still limited in size and therefore can be depleted in a crisis like the present, which is a major upside risk for the GBP/RUB exchange rate.

The Pound-to-Rouble exchange rate is mechanically connected to the USD/RUB exchange rate and in a way that leads it to closely reflect the relative performance of GBP/USD and USD/RUB, which makes TD Securities’ call on USD/RUB relevant to the outlook for GBP/RUB.

GBP/RUB would rise to all time highs of 133.0 in any market where USD/RUB reached 100.00 and if, at the same time, the Pound-Dollar rate was still trading around its Thursday level of 1.3350 although gains would be tempered by any further declines in GBP/USD.

Above: Pound to Rouble rate shown at monthly intervals.