✳️  Secure today's exchange rate for a future payment. You may also book an order to trigger your purchase when your ideal rate is achieved. Learn more.

Image © Adobe Images

Oil surges in value on renewed attacks on shipping in the Persian Gulf.

Pound sterling holds onto recent gains made against the euro and most G10 peers but is softer against the dollar as oil prices lurch higher again.

The price of a barrel of Brent crude crosses $100 on Thursday amidst ongoing concerns that the war in the Middle East is no closer to ending, preventing the flow of oil and gas out of the region for an extended period.

"The market volatility has shown no sign of easing, with Brent crude surging back +8.95% overnight to $100.21/bbl," says Henry Allen, Strategist at Deutsche Bank. "The problem is that investors are increasingly pricing in a more protracted conflict that causes extensive economic damage."

With prices rising, currencies react: the dollar is naturally the biggest beneficiary of renewed oil price gains, and the U.S. currency rises across the board, pressuring pound-dollar rate back to 1.3385.

Pound-euro rallies towards the cusp of 1.16 as pound sterling is bolstered by the inflationary implications of the Iran conflict. Elsewhere, the Canadian and Australian dollars are amongst the outperformers.

"This latest leg higher in oil is giving broad-based support to USD, CAD and AUD, the three big winners so far in G10," says Francesco Pesole, FX Strategist at ING.

President Trump said overnight that the war with Iran was "going great" and could end "soon" because there was "practically nothing left to target."

However, the situation on the ground begs to differ with his assessment this Thursday:

💥 Oman is clearing ships from Mina Al Fahal, a key export terminal outside of the Strait of Hormuz.

💥 Iran attacked two tankers in Iraqi waters.

💥 Iran launched further strikes against targets in Persian Gulf states.

🚫  Chinese refiners cancel agreed refined-fuel export cargoes.

Image courtesy of UniCredit.

Oil rose 3% Wednesday, and we reported that markets were becoming increasingly worried that Washington's rhetoric on ending the war and clearing the Strait of Hormuz was empty.

Classified security briefings in the U.S. Capitol revealed the U.S. administration had no clear plan on reopening the Strait of Hormuz, which is currently shut to shipping, creating a severe global energy supply shortage.

At home, higher energy prices will boost inflation and prevent the Bank of England from lowering interest rates further. Markets see at least one rate hike in the pipeline.

There's been a sizeable shift higher in UK interest rate expectations.

A shift from two cuts to one hike is a long way to travel in just two weeks, and eclipses the shift seen in European and U.S. rate expectations.

The pound's losses against the dollar are still relatively shallow as a result, and 1.3356 continues to be a significant technical line in the sand that GBP/USD has not closed below since December.

Sterling is advancing against the euro and is well supported against the rest of its G10 peers, consolidating against most, even against safe havens such as the franc and yen.

This confirms that the Iran conflict impacts currencies through the interest rate expectations channel.

🚩 The risks for the pound are, nevertheless, considerable.

We maintain the view that an unruly stock market selloff and a significant deterioration in investor sentiment will hurt the pound.

This is because the UK runs a sizeable current account deficit that leaves the pound dependent on the inflow of foreign investment capital. When that dries up, GBP/EUR and GBP/USD tend to fall sharply.

"With no concrete signs of de-escalation yet, that’s keeping oil prices elevated, and raising the risk of a broader stagflationary shock," says Deutsche Bank's Allen.

"Indeed, we know that investors are pricing in the longer scenarios, because the 6-month Brent future is also up +3.06% this morning to $82.97/bbl, and with each passing day it gets harder to argue that the disruption to shipping and energy infrastructure will only prove temporary," he adds.