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GBP/USD is down 1.0% on Tuesday at 1.3269.

The British pound's slump against the dollar deepened on Tuesday as investors grew increasingly anxious about surging global oil and gas prices.

Brent crude surges 8% to $83/barrel on Tuesday, while UK wholesale gas for front-month delivery rockets to £166 a therm, putting it in touch with the highs seen when Russian gas supply to Europe was shut.

Developments on Tuesday send a clear warning signal to markets that damage to physical energy infrastructure in the Gulf means higher prices could be here to stay for some time.

Above: 1-month ahead UK wholesale gas prices point to significant bill increases in the UK.

It's reported today that falling debris from an intercepted drone caused a major fire at the United Arab Emirates' major oil-trading hub of Fujairah. It’s one of the largest oil storage and trading centres in the Middle East.

Energy is priced in dollars, and when supply disruption risks emerge in the Middle East, the resulting price premium on this commodity simply increases global demand for the U.S. currency.

"Opening USD exposure can help diversify the risk of higher energy prices, instead of amplifying portfolio downturns as has been the case through most of the past year," says Jens Peter Sørensen, Chief Analyst for FI Strategy at Danske Bank.

At the same time, Britain and Euro Area countries are net importers of oil and gas, meaning the spike in prices serves as a huge penalty to their economies, and their currencies fall as a result.

"The European currencies of the Swedish krona, Swiss franc and euro have weakened the most against the US dollar since the end of last week reflecting concerns among market participants that European economies would be hit harder by another energy price shock," says Lee Hardman, Senior FX Strategist at MUFG Bank Ltd.

More broadly, the current episode serves as a reminder that in times of heightened global geopolitical anxiety, there are simply no alternatives to the dollar.

The pound's losses against the dollar take GBP/USD to its lowest level since December 03, marking a two-month low for the pair.

The sudden decline marks a rude departure from previously-held assumptions that the dollar would steadily trend lower during 2026, offering the pound a route higher.

Monday's price action saw initial selloffs in equities and non-USD currencies fade through the course of the day as investors believed President Trump would ultimately initiate talks with Iranian leaders to bring about an end to strikes.

That would have followed a previous pattern of Iran-centric periods of risk: initial selloffs that are quickly faded.

But on Tuesday there's doubt that there's a quick fix to this and its becoming increasingly clear that energy facilities in the region are at risk.

Above: The price of Brent crude.

Monday's closures of natural gas facilities in Qatar and oil processors in Saudi Arabia drove a rise in energy prices, as did the warning from Iran's Revolutionary Guard that it would shell ships in the Strait of Hormuz.

On Tuesday, falling debris from an intercepted drone caused a major fire at the United Arab Emirates' major oil-trading hub of Fujairah, confirming facilities are heavily exposed and there's a fear more will be damaged.

The rising price of oil and gas shows markets are factoring in a prolonged disruption to supply, even if hostilities end soon.

It means the dollar's trend of appreciation is now looking far more potent and based on the existing damage wrought on the global growth outlook by rising prices and physical infrastructure damage, those recent gains will be harder to reverse.

Given this, GBP/USD has its nose pointed firmly lower.

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