Pound drops for a second day vs. the euro

The currency weakened against the euro, which gained 0.1% to 0.8659 pence

The pound dropped for a second day against the euro ​on Wednesday, as doubts about the likelihood of peace in ‌the Middle East made traders cautious.

The nearly 7% decline in the oil price this week has given some respite to the currencies of more import-dependent nations, which include sterling, but overall, trading ranges have been narrow and volatility has been contained, reflecting a lack of conviction among ​investors.

Most market participants ⁠believe a resolution to the war is more likely than a full-on escalation, but the level of uncertainty is high.

Energy regulator Ofgem on Wednesday hiked its price cap by 13%, the ​most in more than two years, in response to a surge in wholesale gas prices caused by the war in the Middle East.

The currency weakened against the euro, which gained 0.1% to 0.8659 pence. UK government bond yields, which have increased more ​than those of what are known as developed nations since the start of the war, were down 5 basis points on the ​day at 4.826%, which would normally weigh on the pound.

Kathleen Brooks, research director at broker XTB, said there were some sterling-positive takeaways.

Firstly, ‌she said ⁠increased use of renewable energy in the UK meant the price cap was not rising as fast as in 2022 when the onset of the Ukraine war caused a surge in energy-linked inflation.

Secondly, if there is a peace deal in the coming days that includes reopening the Strait of Hormuz, then energy prices could fall further, which could limit further upside on ​energy bills in future, she said.

She said: Added ​to this, although the ⁠rising price cap will put upward pressure on inflation, the second-round effects are likely to be minimal, since the UK economy is showing signs of weakness and the unemployment rate is ​rising.