Recently, tensions in the Middle East have escalated, causing energy prices to soar, and the British pound against the US dollar has also suffered. I checked the latest data, and the GBP/USD exchange rate once fell below 1.33, hitting a recent low. The logic behind this is quite clear: rising energy prices directly dampen the Bank of England's expectations of interest rate cuts.

Wishart, an economist at Berenberg Bank, pointed out that inflation risks triggered by the Middle East situation might force the Bank of England to delay its planned rate cut in March. Since the UK is a net energy importer, rising oil prices will not only push up inflation but also widen the trade deficit, putting sustained pressure on the GBP/USD exchange rate. Now, the central bank needs to wait until service price inflation fully recedes before considering the next rate cut.

Market reactions are very straightforward. The latest interest rate futures data show that traders now expect the probability of the Bank of England cutting rates in March has fallen below 30%. Even more painfully, the market previously anticipated two rate cuts from the Bank of England this year, but that expectation has now been largely eliminated.

From a more macro perspective, Convera strategist Ruggiero believes that if the Middle East conflict continues, the risk to the GBP/USD will be quite evident. Rising oil prices will hinder economic growth and push up inflation, which will lead to lower tax revenues and higher government borrowing costs. Jane Foley, head of FX strategy at Rabobank, also said that under such uncertainty, both the pound and euro are unlikely to perform well.

Honestly, the current trend of GBP/USD depends on two variables: first, whether the Middle East situation can ease; second, whether energy prices can stabilize. If these two issues cannot be resolved in the short term, the pound still faces the risk of further weakening. Those interested can check out the GBP-related trading pairs on Gate.