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Pound sterling looks to be on course to record its first weekly gain against the euro since late January.

Pound-euro rises to 1.1509 at the time of writing on Friday, marking the highest level in nearly a month.

The February 06 peak stands at 1.1525, which is still some way off for a currency pair that tends to move quite slowly, suggesting the high might be out of scope today owing to the distance already travelled since Monday.

The pair is up 0.86% over the past five days, an advance that if sustained will be the biggest weekly gain since April 2025 and the first advance in five.

Improved momentum is reflected in the crossing of the 50-day moving average, now at 1.1479.

The RSI - see lower panel in the chart - is at 55 and pointing higher, marking building upside momentum:

Gains come as UK bond yields rally in response to the belief that the Bank of England will only cut interest rates on one more occasion in 2026, with some economists warning there won't be any at all.

At the same point last Friday, there was scope for two cuts, with markets pondering a third, meaning there's been a big shift in what the market expects from the Bank of England.

What's changed? The war in the Middle East, of course; it has boosted oil and gas prices which will trigger a global inflationary pulse that the UK might be particularly prone to.

"Oil has still jumped nearly 20% this week, putting it on track for its biggest weekly advance since February 2022. Higher prices tend to feed through to consumers almost immediately via rising petrol costs, which in turn risks reigniting inflation pressures just as central banks were hoping for some relief," says Matt Britzman, senior equity analyst, Hargreaves Lansdown.

The Bank of England knows it cannot cut rates as businesses and households are bracing for higher bills. That would risk triggering a snowball effect of higher inflation pressures across the board.

UK short-term bond yields rise in anticipation of fewer cuts, and this has already prompted mortgage lenders to raise interest rates on their products.

However, for the pound, that dynamic is supportive as it implies the UK will hold onto its superior interest rate advantage relative to the Eurozone.

From here, GBP/EUR will eye the February 06 peak at 1.1525 and beyond there is the February 03 peak at 1.16.

Above: UK two-year bond yields lead GBP/EUR higher.

Risks will be a reversal of recent gains on any sudden drop in oil and gas prices on a resolution of the Middle East conflict, however, the odds of that happening soon are still quite remote based on our reading of events this morning.

Another, more important risk to consider is what happens in the event of a major market decline.

So far, equity markets have held out, confirming investors are hopeful that the conflict will be resolved by talks.

But if oil and gas prices rise further and stay elevated, there's a risk of liquidation, and the pound would be very prone to losses here, as history shows it is vulnerable to major risk-off episodes.

"A prolonged closure of the Strait of Hormuz, or a sustained campaign against energy infrastructure, could yet drive crude and natural gas prices well beyond thresholds that have historically acted as a brake on global growth. The foreign exchange implications are asymmetric: the yen, the euro and sterling stand out as the major currencies most exposed to another wave of selling," says Karl Schamotta, Chief Market Strategist at Corpay.