Sterling Weakens, as UK Stagflation Risks Rise Amid Middle East Conflict
The pound sterling lagged behind other major currencies as markets viewed the UK as relatively more vulnerable to energy shocks from the Middle East conflict. Rising energy prices are seen as risking a rebound in inflation at a time when growth remains fragile, a combination that heightens stagflation concerns and complicates the outlook for interest rate policy.
These risks primarily come from the energy channel. Surging oil and gas prices could increase cost pressures on households and businesses, while simultaneously raising headline inflation. Several UK studies warn that rising energy costs could potentially erode the improvement in purchasing power expected this year, adding to the burden on consumption and weakening the momentum of activity.
In policy markets, persistent energy shocks could narrow the scope for monetary easing as inflationary pressures tend to be “sticky,” while weakening growth limits the aggressiveness of tightening. This makes sterling more sensitive to changes in interest rate expectations and global risk premiums, particularly when energy volatility also increases borrowing costs and exacerbates policy trade-offs.
Going forward, market participants will monitor the duration of the conflict escalation and its impact on oil and gas prices, changes in Bank of England interest rate expectations, and signals on UK domestic demand and cost pressures, which will determine whether the risk of stagflation intensifies or subsides. (Cp)
Source: Newsmaker.id
