Sterling Slides to $1.33 Amid Middle East Tensions

Sterling fell to around $1.33, its lowest level since early December 2025, as a resurgent US dollar drew support from safe-haven demand amid escalating tensions in the Middle East. US President Donald Trump noted that US munitions stockpiles at medium and upper-medium grades are at record levels and “virtually unlimited,” adding that wars could be sustained “forever.” Meanwhile, rising energy costs following the formal closure of the Strait of Hormuz and the continued suspension of Qatari LNG exports could push the Bank of England toward a more hawkish policy stance. Domestic political developments added to Sterling’s woes. Labour’s defeat in Gorton and Denton, a seat it had comfortably held in the 2024 general election, has heightened uncertainty over Party leader Keir Starmer and Chancellor Rachel Reeves, amid speculation that they could be replaced by ministers advocating higher fiscal spending, potentially placing further strain on the UK’s public finances.

Sterling slid to around $1.33 in early March, hitting its lowest level since December 2025, as a resurgent US dollar gained support from a flight to safety amid escalating tensions in the Middle East. The US and Israel launched coordinated strikes on Iran over the weekend, reportedly killing Iran’s Supreme Leader, Ayatollah Ali Khamenei. In retaliation, Tehran attacked US assets in neighboring countries. Pressure on the currency was compounded by mounting domestic political uncertainty following Labour’s shock defeat in Gorton and Denton, a seat it had comfortably won in the 2024 general election. The result raises uncertainty over Starmer and Chancellor Rachel Reeves, amid concerns they could be replaced by ministers pushing higher fiscal spending, which could further strain the UK’s public finances. Markets are now focusing on a new batch of domestic data due this week, including house prices, BoE consumer credit, mortgage approvals, the Halifax House Price Index, and PMI readings.

Sterling slipped below $1.35 after the UK Labour Party lost a special district election, fueling renewed concerns over Prime Minister Keir Starmer’s leadership. Labour lost Gorton and Denton, near Manchester, a seat it had comfortably held in the 2024 general election, with the Green Party taking first place and Labour finishing third behind Reform UK. The result heightens uncertainty over the positions of Starmer and Chancellor Rachel Reeves, amid concerns they could be replaced by ministers favoring increased fiscal spending, further straining the UK’s public finances. Meanwhile, the UK GfK Consumer Confidence Index dropped unexpectedly in February as rising unemployment weighed on sentiment. On the monetary policy front, traders are increasingly pricing in interest rate cuts from the Bank of England, following weaker employment data and continued easing of inflationary pressures.