EUR/GBP edges higher as Middle East tensions lift volatility, UK politics in focus

• EUR/GBP ticks higher as geopolitical tensions drive volatility.
• Energy shock risks from Strait of Hormuz disruptions continue to weigh on the Euro.
• Political uncertainty ahead of the UK local elections adds another layer of focus for traders.

EUR/GBP edges higher on Monday as ongoing tensions in the Middle East keep market volatility elevated, while political uncertainty in the UK adds modest pressure on the British Pound (GBP). At the time of writing, the cross is trading around 0.8645, recovering from an intraday low of 0.8629.

A fire was reported at a petroleum site in Fujairah, UAE, after a drone attack from Iran earlier in the day. In a separate development, Iran’s Fars news agency reported that two missiles struck a US naval vessel near the island of Jask after it allegedly ignored warnings from the Islamic Revolutionary Guard Corps (IRGC) to halt. However, a US official denied that any American vessel had been hit, according to Axios.

However, the cross remains under steady downside pressure since the onset of the US-Iran war and the resulting disruption of flows through the Strait of Hormuz, a key chokepoint that carries around 20% of global Oil supply. While both the UK and the Eurozone rely heavily on imported energy, the UK is relatively less dependent than the Eurozone, leaving the Pound less exposed to the impact of rising energy prices.

Meanwhile, traders are also favoring the Pound over the Euro (EUR) on expectations that interest rate differentials between the Bank of England (BoE) and the European Central Bank (ECB) could widen further. Rising Oil-driven inflation risks are adding to this divergence. The UK continues to grapple with persistent inflation, which remains well above the BoE’s 2% target, while recent data show that price pressure is also picking up in the Eurozone, though it remains relatively more contained than in the UK.

This suggests the BoE may be forced to tighten policy if the inflation outlook deteriorates, whereas the ECB is likely to remain more cautious. The Eurozone’s higher exposure to energy shocks could weigh on growth, limiting the central bank’s ability to raise rates aggressively. Markets are currently pricing in at least two rate hikes from both central banks, though the path ahead remains highly dependent on incoming data and energy price dynamics.

Against this backdrop, EUR/GBP is likely to maintain a downside bias in the near term, with markets continuing to monitor developments in the US–Iran conflict, particularly any signs of a reopening of the Strait of Hormuz.

Attention is also turning to the UK’s local elections on May 7, with polls pointing to potential losses for Prime Minister Keir Starmer’s Labour Party. A leadership contest can be triggered if the leader resigns or if a challenger secures the backing of at least 20% of Labour MPs.