- Pound (GBP) is rising after losses last week
- The BoE may be more cautious about rate cuts
- Euro (EUR) is falling sharply as energy prices jump
- The Strait of Hormuz is key to energy transportation
The Pound-Euro (GBP/EUR) exchange rate is rising on Monday after losses last week. The pair fell -0.25% in the previous week, settling on Friday at €1.1415. It traded between €1.1375 and €1.1488. At 14:30 UTC on Friday, GBP/EUR trades 0.28% lower at €1.1447.
The pound has been rising against the euro but falling against the US dollar, reaching its lowest level in 2.5 months as the market weighs the impact of the conflict in Iran.
With oil prices rising sharply worries over persistently high oil prices are impacting the market. High oil prices could increase inflation, making it harder for the Bank of England to continue cutting interest rates. The market has scaled back rate-cut expectations for March to 74%, down from 78%.
Meanwhile, on the data front, UK factory activity expanded for the fourth straight month in February. PMI data showed that the British manufacturing PMI was 51.7 in February, down from 51.8 in January, the highest since August 2024. However, it remained above the key 50 level, which separates expansion from contraction.
The euro is falling sharply against its major peers in reaction to the jump in oil prices. Those countries and regions that rely on oil and gas imports are feeling the heat most such as Europe and Japan.
European natural gas prices have jumped over 40% on Monday and could more than double if shipping through the Strait of Hormuz is halted for a month or more, according to Goldman Sachs.
Around 20% of the world’s liquefied natural gas, much of it from Qatar, passes through the choke point.
Furthermore, Europe is particularly exposed at the moment as the continent nears the end of winter: gas consumption is slowing, but fuel inventories are unusually low. The region needs to import large volumes of LNG this summer in order to refill ahead of the next heating season. The longer it takes to reopen the Strait of Hormuz, and the longer suppliers in Qatar remain closed, the more prices will rise, impacting the economy.
The market is still only pricing in around a 30% probability of the ECB cutting rates this year.