Energy Security Fears Cloud EUR Outlook

The Pound Euro (GBP/EUR) exchange rate touched a three-week high on Wednesday as the impact of the US and Israeli strikes on Iran continued to ripple out through global markets.

DAILY RECAP:

The Euro (EUR) stumbled at the start of Wednesday’s European session as markets continued to assess the economic and geopolitical fallout from the US-Israel strikes on Iran and the escalating conflict in the Middle East.

One factor that hurt the common currency was rising tensions between the US and the EU, after US President Donald Trump threatened to halt all trade with Spain after it refused to allow the US to use its military bases.

Spanish Prime Minister Pedro Sánchez delivered a defiant response, while EU trade spokesperson Olof Gill hinted at retaliatory measures from Brussels if required.

Gill said:

“The Commission will ensure that the interests of the European Union are fully protected. We stand in full solidarity with all Member States and all its citizens and, through our common trade policy, stand ready to act if necessary to safeguard EU interests.”

Relations between the EU and US have remained strained during Trump’s second term, with disputes over tariffs and remarks about Greenland already souring diplomatic ties.

Despite the early pressure, the Euro later recovered some ground after stronger-than-expected economic data. The Eurozone’s final services PMI was revised higher, while unemployment in the bloc unexpectedly dropped to a new record low of 6.1% in January.

The Pound (GBP) meanwhile moved without a clear direction on Wednesday as investors reacted to the UK’s final services PMI release.

The finalised survey printed in line with expectations, showing decent activity despite a marginal 0.1-point slowdown from the previous month.

However, the report presented a mixed outlook. While rising costs pointed to persistent inflation pressures that could encourage the Bank of England (BoE) to keep interest rates higher for longer, the survey also highlighted job cuts among service providers, raising concerns about labour market resilience.

Near-Term GBP/EUR Forecast: Eurozone Retail Sales and ECB Signals

Looking forward, the Eurozone’s latest retail sales figures could support the Euro on Thursday. Markets expect to see a recovery in January, with sales growth forecast at 0.3% following a 0.5% contraction in December.

Later in the day, investors will also assess the European Central Bank’s (ECB) latest policy meeting minutes, followed by a speech from ECB President Christine Lagarde. If Lagarde highlights upside inflation risks stemming from the Middle East crisis, the Euro may attract additional support.

However, concerns surrounding Europe’s energy security and rising EU-US tensions could continue to weigh on the single currency and inject volatility into EUR exchange rates.

Meanwhile, with little notable UK data scheduled for Thursday, Sterling may struggle to establish a clear direction of its own.