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Pound sterling is softer against the euro at the start of the new week amidst a renewed spike in oil and gas prices.
GBP/EUR falls to 1.1470 and oil prices rise above $100 / barrel on Monday as the U.S. moves to block the Strait of Hormuz, thereby extending the squeeze on global energy supplies.
The move intends to block Iranian-sanctioned shipping from enjoying exclusive use of the channel, thereby strangling a major financial lifeline for the regime in Tehran. The move further compliactes the geopolitical overlay investors must contend with.
President Donald Trump announced the blockade just hours after talks with Iran ended with no deal; by his reckoning, Iran shouldn't be able to sell its oil if no other Middle Eastern nations can.
The rise in oil prices predictably sent stocks and bonds lower as investors worry about fuel shortages and rising inflationary pressures as the world's economies adjust to higher fuel prices.
GBP/EUR followed UK bond yields higher in the first half of March, but having been rejected at 1.16, the pair has since fallen back into the 1.14s, where it has since stabilised.
Where escalations in the Middle East boosted GBP/EUR in the early stages of the war, it's clear now that escalation weighs on the exchange rate.
Last week's optimism over U.S.-Iran talks in Pakistan helped GBP/EUR record a 0.25% gain, an advance that we foresaw in our Week Ahead Forecast printed last Monday, but the advance was ultimately capped by resistance in the form of the 100-day moving average, currently at 1.1486.
That resistance zone will likely restrict the pound in the coming days, which is why we would lean on the bearish side of approaching sterling-euro this week.
At the same time, today's Week Ahead forecast also looks for the pair to stay well supported above the 1.1430-1.1440 horizontal graphical support, as we think it would require a serious and unforeseen escalation to trigger another leg lower.
Ultimately, the U.S. and Iran will probably get back to the negotiating table, which should put a floor under markets.
So for those with pound-euro payments, we think there's a high likelihood the pair is restricted to between 1.1480 and 1.1440, making for a relatively tight range.
"We believe GBP is still exceptionally sensitive to any re-escalation of geopolitical tensions," says Sarah Ying, analyst at CIBC Capital Markets, in a recent note that warns rising energy costs will negatively impact the economy today, and in the coming months.
"The balance of risks favours being long EUR/GBP, and we believe the pair can retest 0.8742 into the coming week," says Ying.
EUR/GBP at 0.8742 gives GBP/EUR at 1.1440.