Recently, I noticed a quite interesting market shift. The escalation of tensions in the Middle East has driven energy prices sharply higher, directly disrupting the Bank of England’s interest rate cut plans. Looking at the latest market expectations, the probability of the Bank of England cutting rates in March has already fallen to below 30%—and this change has happened very quickly.

The impact of rising energy prices on the GBP/USD exchange rate is also clearly visible. Not long ago, GBP/USD briefly fell below 1.33, hitting a recent low. Economists at Berenberg Bank noted that because the UK is a net energy importer, continued increases in oil prices would widen the trade deficit, directly weakening demand for the pound. From this perspective, pressure on GBP/USD is unlikely to ease in the short term.

Even more interesting is the shift in traders’ expectations. Previously, everyone thought the Bank of England would cut rates twice this year, but now even the second rate cut is no longer widely expected. The central bank may have to wait until services price inflation has fallen sufficiently before considering another rate cut. This means the Bank of England is effectively forced into a “wait-and-see” mode.

From a strategist’s point of view, if the Middle East conflict continues to escalate, there is still downside risk for GBP/USD. On the one hand, higher oil prices would weigh on economic growth and push inflation up; on the other hand, the government’s borrowing costs would also rise. Under this double pressure, it will be difficult for the pound to perform well. The head of foreign exchange at Rabobank also believes that there is substantial uncertainty around the potential impact on inflation, and that under such conditions the pound is indeed easy to be viewed bearish.

Overall, if the Middle East situation remains unstable, GBP/USD could continue to face pressure. At this point, it’s actually more important to closely monitor the direction of energy prices and the Bank of England’s statements, because these two factors will directly determine the pound’s next direction.