Sterling firms up with traders split over oil risks

Sterling Rises as Traders Weigh Oil Supply Risks and UK Inflation Pressures

Market Reactions and Economic Implications

By Niket Nishant

Sterling Performance Amid Global Uncertainty

LONDON, March 11 (Reuters) - The British pound inched higher on Wednesday, in a choppy session that saw traders weighing fears of an oil supply shock from the Middle East conflict against reports of potential reserve releases.

Sterling rose 0.1% to $1.3430 against the dollar and 0.2% to 86.32 pence against the euro, offering a rare pocket of resilience in Europe.

Impact of Energy Prices on the UK Economy

A hike in energy prices has stirred concern over import-reliant economies such as Britain's. Oxford Economics estimated that UK inflation could be 0.4 percentage points higher if shipping through the Strait of Hormuz, a crucial artery for global oil flows, was disrupted for up to two months.

"The UK is very exposed in terms of energy costs. People are going to be very concerned that we will see a material economic slowdown," said Chris Beauchamp, chief market analyst at IG.

Shifting Focus: Domestic vs. Global Risks

Global factors have also shifted attention away from the domestic economic and political risks that weighed on the pound in recent weeks.

Political Uncertainty and Upcoming Elections

However, Bank of America Securities analysts warned that investors may be underpricing the uncertainty related to the elections in May, where Prime Minister Keir Starmer's government is expected to face a tough test.

Oil Prices and Policy Responses

Investors Brush Off Price Containment Efforts

Oil prices climbed on Wednesday despite reports that the International Energy ​Agency was planning a record release of oil reserves.

Government Measures to Cushion Households

In a note, Deutsche Bank's chief UK economist Sanjay Raja said the government could consider a range of policy responses to cushion the hit to households, including extending a duty freeze on fuel and temporary tax breaks.

"The key lies in balancing immediate household relief with broader fiscal responsibility amidst ongoing economic uncertainty," Raja wrote.

Bond Market Reaction

British government bond prices fell on Wednesday, pushing yields on the 10-year gilt up 3.2 basis points.

Geopolitical Tensions and Energy Supply Risks

Middle East Conflict Escalation

Meanwhile, Iran fired at Israel and targets across the Middle East, demonstrating that Tehran can still fight back and disrupt energy supplies despite the most intense U.S.-Israeli strikes yet.

U.S. Response to Oil Supply Threats

U.S. President Donald Trump has threatened tougher strikes on Iran should it continue to disrupt oil shipments, but Tehran has shown little sign of backing down.

(Reporting by Niket Nishant; Editing by Aidan Lewis)