Sterling surged against the Euro in early Monday trading, reaching a fresh multi-week high of 1.1559. The rise was linked to another jump in oil and gas prices, as energy supplies from the Middle East remain largely offline.

However, the early spike in oil prices during the Asian session later eased, prompting the GBP/EUR pair to pull back to 1.1526.

The Euro is seen as particularly exposed to rising oil and gas prices, especially due to the economic shock caused by Russia’s invasion of Ukraine.

European gas prices jumped by as much as 30% to €69.50 per megawatt hour when trading opened on Monday, and have now more than doubled since the crisis began.

Prior to the Middle East conflict, markets had anticipated that the Bank of England would cut interest rates more aggressively than other central banks, a factor that had been putting significant pressure on the Pound. However, like many other economies, the UK is now confronting a renewed inflationary shock.

Expectations for UK interest rates have shifted more sharply. Just two weeks ago, markets were pricing in at least two rate cuts for 2026, but now a rate hike is being anticipated, Pound Sterling Live reports.

As a result, markets this week are likely to be driven by the headline-sensitive interaction between oil and gas prices and interest rate expectations.

This dynamic is making markets highly reactive to developments related to the Middle East conflict.

The shift in expectations for UK interest rates has been particularly pronounced. While markets were anticipating at least two rate cuts in 2026 just two weeks ago, they are now pricing in a rate hike instead.

In essence, there was always greater potential for a hawkish adjustment in UK rate expectations than in other markets, which has provided support for the Pound.

Consequently, the interaction between oil and gas prices and interest rate expectations, largely driven by headlines, is set to dominate market movements this week.

This dynamic is making markets highly sensitive to developments related to the Middle East tensions, where the US, Israel, and Iran remain firmly entrenched, leaving little immediate prospect of a ceasefire.