Brace yourself: the pound weakens as global markets wobble, driven by a renewed surge in oil and gas prices and rising Middle East tension. And this is where the story gets more complicated...
Pound sterling slipped against both the euro and the dollar on Tuesday, mirroring a softening stock market world-wide. The reversal comes as energy prices climb higher, fueling concerns that Middle East outages will persist and disrupt global supply chains. Iran has targeted energy facilities across the region, and its Revolutionary Guards signaled plans to shell ships traversing the crucial Strait of Hormuz, a chokepoint through which much of the world’s oil and gas must pass to reach markets.
Susannah Streeter, Chief Investment Strategist at Wealth Club, notes that negative sentiment is spreading through equities as the conflict intensifies and companies weigh the impact of widespread disruption: London’s FTSE 100 is slipping deeper into the red as the war broadens. Higher oil and gas costs typically push demand for dollars, reinforcing the idea of the dollar as the ultimate petro-currency and putting downward pressure on GBP/USD toward 1.3310 in the process. Meanwhile, GBP/EUR remains tightly linked to global stock performance, with the S&P 500 serving as a useful barometer for the currency pair. As Monday progressed, both markets showed a modest recovery, suggesting the potential for a swift reversal if sentiment brightens.
The takeaway is clear: if global risk appetite turns or persists, it will steer the pound-euro trajectory because traders increasingly price in macro sentiment alongside stock moves. U.S. stock futures point to a weaker open, helping explain the red move in GBP/EUR around 1.1446 after a Monday peak near 1.1466. Earlier in the day, the rate had touched as low as 1.1379 as fears around the Middle East crisis peaked. The market remains jittery: the downside risks for the world economy and markets are real, but investors also recognize that sentiment can shift quickly.
There’s also political risk on the table. President Donald Trump’s stance hints at avoiding runaway inflation ahead of mid-term elections, and while he has voiced willingness to negotiate with Iran, investors question whether Iran has a clear negotiating partner following high-profile attacks and ongoing uncertainty about any durable settlement. In this environment, the pound faces additional pressure.
“Iran is retaliating to attacks by Israel and the U.S. and has threatened to set fire to ships using the Strait of Hormuz. Because this route handles roughly a fifth of global oil and gas supplies, energy prices are climbing,” Streeter explains.
Britain’s energy profile adds to the risk. The U.K. is a net energy importer, so a renewed surge in oil and gas prices would raise inflation and complicate the Bank of England’s path toward its 2.0% inflation target. Wholesale gas prices for April delivery have climbed back to levels seen after Russia’s invasion of Ukraine, following the shutdown of major LNG facilities in Qatar in the wake of Iranian drone activity. If energy prices stay elevated, European inflation could rise markedly, and economists warn this could push the U.K.’s CPI higher than previously forecast.
Analysts like Andrew Wishart of Berenberg Bank estimate that persistent energy-price pressures could add roughly 0.7 percentage points to UK inflation compared with their baseline, complicating the BoE’s policy timing for any near-term rate moves. The broader concern is a renewed hit to the U.K. economy from energy costs that could strain public finances and test market confidence in the sustainability of the country’s fiscal trajectory during a global crisis.
Beyond energy, other headwinds linger for the pound: political uncertainty as Labour shifts leftward, a potential rise in domestic unemployment, and a public debt environment that seems perpetually on the edge of strain. An additional energy shock could bring these pressures to a head sooner rather than later.
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