Rising tensions in Iran have intensified global uncertainty, prompting risk-off sentiment that is weighing on GBP exchange rates
Investors may look to safe haven assets like gold in the wake of military strikes in the Middle East, after the US and Israel struck Iran and Iranian missiles targeted US military bases in the region. A prolonged conflict could see capital flow away from the dollar and into alternatives like the Swiss franc and Japanese yen. When the US bombed targets in Iran last June, the dollar index briefly weakened. If and how far it will fall this time will depend on how long hostilities last and how far military action spreads to the wider Gulf region.
As a result, the dollar has surged in early trading this week, putting GBP/USD on track for an almost 1% decline since Friday, a sharp move over a short period.
However, the broader trend still tells a different story, the euro remains nearly 12% up against the dollar over the last year. The pound is also well ahead – over 5% – on a 12-month basis.
Political uncertainty dogs sterling
Sterling is under pressure after last week’s heavy Government defeat in an important UK parliamentary by-election. Labour lost what was considered the safe seat of Gorton and Denton in Manchester to the Green Party, coming in third behind Reform UK. Money markets don’t like political uncertainty and the result could undermine the positions of Prime Minister Keir Starmer and Chancellor Rachel Reeves. The pound slid against the euro in the aftermath of the result, and has now lost over 6% against the EU currency in the last 12 months.
The week ahead:
Investors will naturally be drawn to developments in the Middle East as they decide their next moves. In addition, a busy week for data releases in the US includes manufacturing (Monday) and services (Wednesday) PMIs (snapshots of economic confidence) and the labour market report for February (Thursday). In the EU, inflation (Tuesday) and unemployment (Wednesday) are key indicators of underlying economic performance. In the UK, the Chancellor’s Spring Statement (Tuesday) will include updates on growth, inflation, unemployment, government spending and tax income.
