GBP/USD Under Pressure As Oil Tops $100

The Pound to Dollar exchange rate weakened last week as investors sought the safety of the US Dollar amid rising energy prices and disappointing UK economic data.

DAILY RECAP:

The US Dollar (USD) strengthened as global markets grappled with the economic implications of surging oil prices and the escalating crisis in the Middle East.

Oil prices briefly surged above $100 per barrel after attacks on energy infrastructure and shipping routes in the Gulf intensified fears of prolonged supply disruption.

The resulting risk-off mood prompted investors to seek the safety of traditional safe-haven assets, boosting demand for the ‘Greenback’.

Although the Dollar briefly softened after US President Donald Trump suggested the conflict with Iran could end “very soon”, this relief proved short-lived.

Fresh reports of attacks on energy facilities and shipping in the region quickly revived fears that the disruption to global oil supplies could last far longer than initially hoped.

At the same time, resilient US inflation data reinforced expectations that the Federal Reserve may keep interest rates elevated for longer.

Sticky inflation has strengthened the view among investors that the Fed will remain cautious about easing monetary policy, helping underpin the US Dollar.

Meanwhile, the Pound (GBP) struggled for direction through much of the week.

Sterling initially faced pressure as UK government bond yields surged amid rising inflation concerns tied to the energy crisis.

Markets fear the spike in oil and gas prices could force the UK government to introduce further support measures for households, potentially increasing pressure on the public finances.

Midweek trading saw the Pound drift in the absence of major UK economic data, even as investors continued to trim expectations for Bank of England interest-rate cuts.

However, Sterling came under renewed pressure toward the end of the week after the latest UK GDP figures disappointed.

Official data showed the UK economy stalled in January, with output unchanged month-on-month rather than rising by the expected 0.2%.

The weaker growth reading reinforced concerns that the UK economy remains fragile and helped drive the Pound lower against the stronger US Dollar.

Near-Term GBP/USD Forecast: Central Bank Decisions in Focus

Looking ahead, central bank policy decisions may influence movement in the Pound to Dollar exchange rate in the coming sessions.

The Federal Reserve is widely expected to leave interest rates unchanged, but markets will scrutinise policymakers’ guidance for clues about how the energy shock could influence the inflation outlook.

If Fed officials signal that higher energy prices risk prolonging inflation pressures, the US Dollar could strengthen further.

Meanwhile, the Bank of England is also expected to keep rates on hold.

However, Sterling could find some support if policymakers suggest that the surge in global energy prices may require a more cautious approach to easing monetary policy.

Nevertheless, developments in the Middle East and movements in energy markets are likely to remain the dominant drivers of sentiment for the foreseeable future.