GBP At One-Month Best As Oil Spikes To $113

The Pound Euro exchange rate climbed to a one-month high last week as escalating Middle East tensions triggered sharp volatility in global energy markets.

Crude oil prices surged when markets reopened, briefly spiking to $113 per barrel before pulling back toward the $101 level. The dramatic swings in energy prices have heightened inflation concerns and injected fresh uncertainty into currency markets.

WEEKLY RECAP:

The Pound (GBP) firmed early in the week after US and Israeli strikes on Iran over the weekend triggered a sharp rise in global energy prices.

The spike in oil and gas costs prompted investors to scale back expectations for a Bank of England (BoE) interest rate cut in March, amid concerns that higher energy prices could add to inflationary pressures in the UK.

As the week progressed and energy prices continued to climb, markets further pared their bets on imminent monetary easing, lending additional support to Sterling.

However, a mixed UK services PMI release midweek tempered the Pound’s momentum. While the survey indicated continued expansion in the services sector and persistent price pressures, it also revealed that firms were reducing their workforce, raising concerns about the resilience of the UK labour market.

Despite the mixed data, Sterling maintained an upward bias through the latter part of the week, allowing GBP/EUR to climb to its highest levels in a month.

Meanwhile, the Euro (EUR) came under pressure early in the week following a larger-than-expected contraction in German retail sales for January.

The single currency also faced headwinds from its negative correlation with the US Dollar (USD), which rallied strongly amid the risk-off market mood triggered by the Middle East conflict.

Rising global energy prices added to the pressure on the Euro, as investors worried about the potential impact of higher energy costs on the already fragile Eurozone economy.

EUR sentiment was further dented by escalating tensions between the EU and the US after President Donald Trump threatened to suspend trade with Spain over the country’s stance on the Iran conflict. Brussels subsequently signalled that it may consider retaliatory measures if Washington moved forward with restrictions.

Near-Term GBP/EUR Forecast: UK GDP in Focus

Looking ahead, attention will turn to the UK’s latest GDP figures, scheduled for release on Friday.

Economists expect the UK economy to have expanded by just 0.1% in January. While such modest growth may limit Sterling’s upside potential, any significant deviation from forecasts could trigger a stronger reaction in the Pound.

For the Euro, mixed German data could create volatility at the start of the week. Industrial production is forecast to rebound in January, while factory orders are expected to show a notable contraction.

Later in the week, a projected recovery in Eurozone industrial production may provide some support for the single currency.

However, developments in the Middle East are likely to remain a key driver for GBP/EUR. If the conflict continues to disrupt energy markets and push prices higher, the Euro may remain vulnerable due to Europe’s exposure to rising energy costs.