Overview
Currencies markets are reflecting a strong link between EUR/GBP and oil prices, a relationship that ING attributes to the perception that the United Kingdom is carrying a larger inflation burden and that Bank of England policy will be more sensitive to energy price movements. ING cautions that market positioning has moved to a point where it is effectively pricing out the prospect of BoE easing too aggressively.
Market moves and valuation signals
ING highlights that the two-year GBP swap rate has risen by 50 basis points since the Iran conflict began. Despite that rise, market pricing currently implies no further rate changes from the BoE before year-end. ING notes that if geopolitical tensions were to ease, such positive de-escalation surprises would carry meaningful upside risk for EUR/GBP.
The bank's valuation work suggests that a move in EUR/GBP below 0.860 would be stretched unless market participants begin to seriously price in a BoE rate hike. That assessment frames ING's caution about how far sterling can strengthen given current fundamentals and market expectations.
Intraday levels and recent drivers
At 12:09 GMT, the euro inched higher versus the British pound, with EUR/GBP quoted at 0.8629, up 0.05%. At the same time, the pound slid against the U.S. dollar, with GBP/USD at 1.3392, down 0.15%. The pound's weakness coincided with a rise in oil prices back above $100 per barrel after Iran attacked tanker ships, prompting renewed concern about potential supply disruption in the region.
UBS outlook on sterling
UBS strategists continue to sit on a bearish view of the British pound. The bank's targets include 0.89 for EUR/GBP by the end of the second quarter and 1.31 for GBP/USD over the same horizon. UBS attributes these targets to risks stemming from the Middle East conflict and its knock-on effects for energy markets.
In a note issued on Wednesday, UBS said the near-term risks for sterling are heavily skewed to the downside. The bank also observed that its first-quarter target of 0.88 for EUR/GBP may be difficult to reach with three weeks remaining in the quarter. UBS's GBP/USD path is set at 1.33 by the end of the first quarter and 1.31 at the end of the second quarter, figures that align with its updated EUR/USD forecasts of 1.16 for both periods.
Implications
These assessments from ING and UBS underline the influence of energy price moves and geopolitical developments on currency valuation and market expectations of central bank behaviour. The interplay between oil, inflation expectations in the UK, and swap rate moves is central to how traders are positioning around sterling and euro crosses.