Pound-Euro Risks Retest of 1.1440 This Week
- Written by: Gary Howes
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Pound sterling is softer against the euro at the start of the new week amidst a renewed spike in oil and gas prices.
GBP/EUR falls to 1.1470 and oil prices rise above $100 / barrel again after the U.S. said on Sunday its navy would join Iran in blocking the Strait of Hormuz to shipping, thereby extending the squeeze on global energy supplies.
Of course, this is no joint U.S.-Iranian exercise: it's the U.S. trying to exert its control of the Strait in an effort to pressure Iran at the negotiating table. President Donald Trump announced the blockade just hours after talks with Iran ended with no deal. By his reckoning, Iran shouldn't be able to sell its oil if no other Middle Eastern nations can.
The rise in oil prices has predictably sent stocks and bonds lower as investors worry about fuel shortages and rising inflationary pressures as the world's economies adjust to higher fuel prices.
GBP/EUR followed UK bond yields higher in the first half of March, but having been rejected at 1.16, the pair has since fallen back into the 1.14s, where it has since stabilised.
Where escalations in the Middle East boosted GBP/EUR in the early stages of the war, it's clear now that escalation weighs on the exchange rate.
Last week's optimism over U.S.-Iran talks in Pakistan saw GBP/EUR record a 0.25% gain, an advance that we expected in our Week Ahead Forecast printed last Monday, but the advance was ultimately capped by resistance in the form of the 100-day moving average, currently at 1.1486.
That resistance zone will likely restrict the pound in the coming days; it's pointing lower and is why we would lean on the bearish side of approaching sterling-euro this week.
At the same time, our Week Ahead forecast also looks for the pair to stay well supported above the 1.1430-1.1440 horizontal graphical support, as we think it would require a serious and unforeseen escalation to trigger another leg lower.
Ultimately, the U.S. and Iran will probably get back to the negotiating table, which should put a floor under markets.
So for those with pound-euro payments, we think there's a high likelihood the pair is restricted to between 1.1480 and 1.1440, making for a relatively tight range.
