Euro extends losses against British Pound amid high Oil prices and risk-off markets

The Euro (EUR) opened the week in the same weak tone it closed the last one, as the British Pound (GBP) got a boost from strong UK Gross Domestic Product (GDP) and Industrial Production data. On Monday, high Oil prices and dismal market sentiment are putting additional pressure on the EUR/GBP pair, which has extended losses to nearly two-week lows at 0.8560, from Friday's highs near 0.8600.

Data released by National Statistics on Friday revealed that the UK's GDP accelerated to 0.4% growth in July, beating the market consensus of a flat performance, with Industrial Production growing against expectations and services activity improving beyond forecasts. The Pound rallied against most peers following the data.

The common currency is struggling across the board on Monday as high Oil prices pose a serious weight on the Eurozone’s economic growth and add pressure on the ECB to tighten its monetary policy further. Brent Oil is trading near $104.00 per barrel, after rallying more than 20% over the last two weeks, as the Middle East conflict threatens to slip into a full-blown regional war. 

News reports advances by the Iran-backed Houthi militias on the Red Sea coast, which would allow them to close the Strait of Bab el–Mandeb. This would force Gulf countries to redirect Crude Shipments through the Suez Canal, increasing freight costs significantly. Meanwhile, the Strait of Hormuz remains practically closed, and a meeting by Gulf countries to reopen it has been postponed.

BoE monetary policy meeting in focus this week

In the UK, the highlight this week will be the BoE's monetary policy decision, due on Thursday. The bank is widely expected to leave interest rates unchanged amid a split committee, and investors will be looking at the number of hawkish dissenters to assess the chances of a rate hike in the coming months.

Economists at Commerzbank argue that the Bank of England’s cautious stance is likely to persist in the near term, despite markets' recent bets on rising interest rates. They note that “if growth seen in July continues into the coming months, this will likely prompt the Bank of England to consider interest rate rises (...) until then, however, uncertainty about the underlying growth momentum is likely to further reinforce the Bank of England's cautious stance on interest rates.”

Against that backdrop, Commerzbank warns that there is “corresponding potential for disappointment and thus downside risks for the Pound” should the BoE fail to validate the market’s more aggressive tightening expectations.