EUR/GBP bears are back in town, stalling euro's advance, Ukraine crisis risks are deep rooted

• EUR/GBP is on the backfoot as ECB fails to convince euro buyers. 
• Ukraine's crisis is overwhelming financial markets and the euro. 

EUR/GBP has been sinking to print fresh lows on the day following an initial spike to the upside over what has been a volatile start to the US session. The European Central Bank and the Ukraine crisis has been at the core of the price action on Thursday. At the time of writing, EUR/GBP prints 0.8395 after falling from the 0.8435 highs.

The euro has retreated from its overnight gains on Thursday following the European Central Bank's announcement that it intends to phase out its stimulus in the third quarter. On the flip side, the greenback has rallied following another strong US inflation report that firms up expectations of a rate hike next week from the Federal Reserve. 

Meanwhile, the statement from the ECB, which left the door open to an interest rate hike before the end of 2022, initially sent the euro higher, but the risks of escalation in Ukraine is overwhelming financial markets. The euro has given back gains on the day and at 15 30 GMT,  the euro was down 0.71% at 1.0995 having jumped 1.6% on Wednesday.

The euro made its best day in nearly six years yesterday and touched a post ECB knee-jerk high of 1.1121 today. However, in a similar fashion, the pound has also sold off. GBP/USD is losing around 0.30% on the day so far as bids for the US dollar dominate forex flows. This potentially leaves EUR/GBP somewhat caught between its range for the day ahead. 

A 22-month low of $1.0804 was printed earlier in the week as traders with investors fear that Ukraine will have a significant impact on European growth in what is Europe's biggest security crisis since 1945. There is little evidence that things are about to improve. 

No let-up in the Ukraine crisis

The foreign ministers of Ukraine and Russia failed to reach peace during the highest-level meeting in three weeks of war Thursday. The bombardment and airstrikes continued to devastate the city of Mariupol.

Both Ukraine’s Dmytro Kuleba and Russian counterpart Sergei Lavrov made clear in duelling news conferences after the face-to-face that they had made no progress. The Ukrainian tweeted that his counterpart “seemed to have come to talk, not to decide.” “They seek Ukraine’s surrender. This is not going to happen,” Kuleba said.

As for central bank divergences, the ECB is trailing other major central banks such as the US Federal Reserve and the Bank of England in the post-pandemic tightening cycle, which is likely to continue weighing on the single currency. Coupled with the worries about Germany’s energy security increase the vulnerability of the EUR vs. the GBP.  

''This will likely slow any recovery in EUR/GBP and opens downside potential in the near-term,'' analysts at Rabobank warned earlier in the week. 

''On the downside, the first level to watch is the bottom of the bear channel at around 0.827.  We would expect considerable support in the 0.8250-0.8200 area given that a break below would leave GBP eyeing up pre-2016 Brexit referendum levels.''