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Pound sterling is off its lows against the euro, but is still prone to further losses in the coming days.

Pound-euro fell as low as 1.1385 in early London trade but soon recovered from the floor to rise back above 1.14 with traders looking for signs of de-escalation in the Middle East.

History tells us that markets tend to recover rapidly when military campaigns are designed to be limited in duration and bolster bargaining power at the negotiating table.

President Trump told one news outlet at the weekend that Iran's new leadership wants to talk with him and that he plans to do so, suggesting scope for Iran to find an offramp.

"They want to talk, and I have agreed to talk, so I will be talking to them. They should have done it sooner. They should have given what was very practical and easy to do sooner. They waited too long," he said.

U.S.-Israeli military strikes on Iran began on Saturday and resulted in the killing of Iran’s supreme leader, Ayatollah Ali Khamenei, and the rest of the senior leadership.

Trump said operations will continue "in full force" in a video posted on his social media channels.

Oil prices frame the global market reaction: brent is trading 7% higher than Friday's close at $78 a barrel as traders focus on the key Strait of Hormuz, which is effectively closed now. The Strait is a crucial conduit for Middle Eastern oil into global markets.

The British pound has been one of the biggest losers of these new Middle East geopolitical tensions, largely for the fact that the UK is a net energy importer and rising oil prices will impact the domestic economy negatively. Recent history provides a precedent: we recall how hard the currency was hit when Russia invaded Ukraine and energy prices spiked.

Rising oil prices will be felt on Britain's forecourts and will therefore limit the extent to which inflation is expected to fall in the coming weeks, potentially denying the Bank of England a window of opportunity to lower interest rates beyond March.

The coming week will be shaped by headlines concerning the conflict. As Pound Sterling Live expected, the traditional safe-haven currencies of the CHF, USD and JPY have all risen in response to developments in the Middle East and should stay supported.

It is interesting to see the pound is struggling against most of its G10 currency peers, whereas in previous risk-off episodes, it would typically rise against at least half the basket, which just confirms it to be a real laggard at present.

This speaks of the particularly poor fundamentals behind the pound at present, and those with GBP/EUR payments in the coming days should be aware that rallies will continue to be tepid as a result.

Domestic developments this week include a Spring Statement by the Chancellor of the Exchequer, but this is likely to be low-key and no major spending or taxation plans are scheduled.

Above: The 15-minute chart shows much of the damage to GBP/EUR happened on Friday when it became clear the U.S. was preparing a weekend attack. Pound Sterling Live was the only publication covering the price action at the time.

A significant vulnerability for sterling will be what happens to gas prices and whether Monday's surge will be sustained.

Qatar - which accounted for about 18.8 % of all global LNG exports in 2024 - shut down liquefied natural gas production at the world’s largest export facility after it was targeted in an Iranian drone attack.

Analysts describe this as an unprecedented halt and European gas prices surged more than 50% in response.

European benchmark gas futures jumped the most in nearly four years, after QatarEnergy confirmed Monday that output had been suspended.

Above: UK natural gas for April delivery.

Tankers had already largely stopped transiting the Strait of Hormuz, a critical artery for global fuel shipments.

For UK businesses and households, the event will inevitably be felt in the coming months, and this will severely constrain the Bank of England's ability to lower interest rates and stimulate economic growth.

Meanwhile, the UK's public finances were precarious enough ahead of a renewed shock, and Chancellor Rachel Reeves will also be desperately hoping that the situation in the Middle East calms down.