13.03.202600:46 Forex Analysis & Reviews: EUR/GBP. The British Paradox: The Pair Declines Amid the Escalating Energy Crisis

The EUR/GBP cross pair has been declining almost continuously for the second week in a row, despite the worsening energy crisis. The price of the pair reached a five-week low at 0.8620, whereas it approached the 88 figure just the week before, before the start of the conflict in the Middle East. The Middle Eastern crisis has radically "redesigned" the fundamental picture for the pair. The European currency has come under pressure, while the pound has unexpectedly emerged as a beneficiary of the situation.

The current dynamics of EUR/GBP reflect the consequences of the energy crisis. The euro is more sensitive to rising energy costs, as the European region is a net energy importer. The sudden rise in prices (wholesale oil prices increased by 35%, gas prices by nearly 70%) has hit the European currency hard. Additionally, ongoing strikes affecting shipping and rising insurance premiums impact the European manufacturing sector more severely than the British sector due to the EU's greater integration into global supply chains.

The UK is also suffering from the consequences of the Middle Eastern conflict, but with important caveats. For instance, production on the British North Sea shelf meets about 40-45% of the UK's gas needs. In comparison, Germany's domestic production covers only 5% of its requirements.

For traders dealing with EUR/GBP, relative resilience is crucial, positioning the pound (against the euro) in a favorable light.

However, there is also a downside to the situation, which likewise works in favor of the British currency. Over 80% of UK homes rely on gas for heating. Therefore, a sharp spike in energy prices (and prices are rising, even with domestic production) will inevitably reflect upon inflation, which had been showing a downward trend before the Middle Eastern crisis began. This means the Bank of England will likely take into account the risks of a second wave of inflation and "cancel" its plans to cut interest rates—at least through the next two meetings (the first of which is already scheduled for next week).

As for the Eurozone, the situation is somewhat different. The European economy is more sensitive to gas prices as raw materials for production. For example, Germany is less dependent on gas in the residential sector (compared to the UK), yet its industry suffers more from high energy prices since gas is actively used in the chemical and metallurgical sectors. In the UK, however, the service economy predominates, making it "easier" for the UK to withstand high gas prices than German factories.

In other words, while high gas prices mean higher bills (i.e., rising consumer inflation) for the UK, for the Eurozone (especially Germany), they pose a significant blow to the industrial sector and a risk of degrading the industrial base (and inflation).

Additionally, a psychological factor plays a role here: the UK is perceived by traders as geographically and politically more distant from the direct impact of instability on the eastern borders of the EU and the energy crisis in the Eurozone.

In the current circumstances, the pound is enjoying increased demand against the euro. Concerns about stagflation in the Eurozone favor sellers of EUR/GBP. The market is pricing in a scenario where the European Central Bank will have to choose between combating inflation and supporting a slowing economy. According to some analysts, the central bank may have to "tolerate" the energy shock to avoid a recession.

Additional support for the pound comes from rising UK yields. As mentioned earlier, the likelihood of a rate cut by the Bank of England has sharply decreased (some analysts even suggest the possibility of tightening monetary policy by the end of the year), resulting in a significant increase in British bond yields—specifically, the yield on two-year bonds has risen by more than 50 basis points.

Thus, the cross pair retains the potential for further decline.

From a technical standpoint, the EUR/GBP pair on the D1 timeframe is positioned between the middle and lower lines of the Bollinger Bands indicator and below all the lines of the Ichimoku indicator, which has formed a bearish "Parade of Lines" signal. A similar pattern is observed on the H4 timeframe. The nearest target for the downward movement is the mark of 0.8600, which corresponds to the lower line of the Bollinger Bands indicator and simultaneously the upper boundary of the Kumo cloud on the weekly chart. The main medium-term target will be around 0.8550 (the middle line of the Bollinger Bands indicator on the monthly timeframe).