Pound Extends Its Decline
Sterling fell for a third consecutive day against both the euro and the dollar, as investors focused on renewed Middle East tensions and domestic political uncertainty in the United Kingdom.
The pound dropped 0.20% to 1.34 dollars after earlier touching 1.3368 dollars, its lowest level since May 18.
Dollar Gains On Safe-Haven Demand
The dollar edged higher on Thursday as investors sought safer assets amid doubts over a potential agreement to reopen the Strait of Hormuz.
Sentiment weakened after Iran’s Revolutionary Guards struck a U.S. airbase, hours after President Donald Trump rejected reports that Washington was close to reaching a deal with Tehran.
Markets Reprice Iran War Risk
The latest escalation has reduced hopes of a quick diplomatic breakthrough and shifted investor attention back toward inflation, oil prices and possible U.S. interest rate hikes.
Persistent uncertainty over the Strait of Hormuz remains especially important for currency markets, given its role in global energy supply and inflation expectations.
Political Risk Weighs On Sterling
Francesco Pesole, forex strategist at ING, said upside risks remain for euro-sterling because political risk in the UK could be repriced by markets.
Potential rivals to Prime Minister Keir Starmer, including Greater Manchester Mayor Andy Burnham, have begun positioning themselves for a possible Labour leadership challenge, though Starmer has said he would fight any contest.
Euro-Sterling Nears Recent High
The euro rose 0.10% to 86.69 pence, its highest level against the pound since May 19.
Pesole said the pair may struggle to trade sustainably above 0.87 in the near term unless the European Central Bank turns especially hawkish or the Bank of England becomes more dovish.
ECB Rate Hike Expectations Rise
Traders are now fully pricing in two European Central Bank rate hikes by the end of the year.
That shift followed hawkish remarks from ECB officials, including chief economist Philip Lane, who said the energy shock caused by the U.S.-Israeli war on Iran would likely have a persistent effect on inflation.
Bank Of England Takes A Cautious View
Bank of England policymaker Alan Taylor said last week that he saw less risk of second-round inflation from the Iran war than from Russia’s 2022 invasion of Ukraine.
Governor Andrew Bailey also said the central bank has time to assess the impact of the conflict before making major policy decisions.
Persian Gulf News Could Shift The Pair
Thierry Wizman, global forex and rates strategist at Macquarie Group, said the UK remains under a cloud of uncertainty because of the possibility of a Labour leadership election.
He added that euro-sterling could rally if better news emerges from the Persian Gulf, suggesting that an easing of energy risks may support the euro more than the pound in the current political environment.
Sterling Faces Multiple Pressures
The pound is being pulled lower by a combination of safe-haven dollar demand, political uncertainty in Britain and diverging expectations between the ECB and the Bank of England.
For now, the outlook depends on whether Middle East tensions escalate further, whether UK political risk intensifies and whether central banks respond more aggressively to the inflationary effects of the energy shock.
