Pound Pressured by Energy Price Surge
The drastic rise in natural gas prices due to tensions in the Middle East has dealt a heavy blow to the Pound Sterling and complicated the prospects for UK monetary policy.
Sterling fell sharply on Tuesday (March 3), with GBP/USD breaking below the 1.3400 mark in Asian trading as conflicts in the Middle East continue to escalate. The selloff followed a dramatic spike in energy costs after a drone strike from Iran forced Qatar to suspend liquefied natural gas production at Ras Laffan, the world's largest LNG export facility, which accounts for roughly 20% of global supply. The disruption sent European natural gas prices soaring more than 50%, pushing them to their highest level in over a year.
In the UK, April natural gas futures jumped to as high as £121 per therm, the strongest level since December 2022. The surge in energy costs poses a renewed challenge for businesses and households, while intensifying political pressure on Prime Minister Keir Starmer.
The energy shock also adds to the policy dilemma facing the Bank of England. Policymakers must now balance the need to support a fragile economy against the risk of renewed inflationary pressures stemming from higher utility bills.
The combination of geopolitical risk and rising energy prices prompted some investors to trim sterling exposure. Still, analysts caution that the currency's next move will hinge largely on how the conflict evolves.
In a worst-case scenario, a prolonged war could keep gas prices high and push UK inflation up to around 3.1% by January 2027—further away from the BoE's 2% target. Paradoxically, sustained inflationary pressure could delay further rate cuts and lend medium-term support to the pound.
If the spike in energy prices proves temporary, the impact on inflation may be limited. Under such circumstances, the BoE could retain scope to resume its easing cycle, albeit potentially at a slower pace.
Robert Wood, chief UK economist at Pantheon Macroeconomics, said it is still too early to conclude the full impact of the conflict on energy prices. He suggested that the inflationary effect could be modest if prices retreat faster than current market expectations. Nevertheless, he warned that persistent energy cost pressures may compel the BoE's Monetary Policy Committee to postpone rate cuts this year.
For now, near-term direction in GBP/USD is likely to be driven by developments in energy markets and the trajectory of the unfolding geopolitical crisis.