Sterling Rebounds as Dollar Softens Amid Middle East News

Sterling climbed to $1.338, recovering some of the early-week losses that had pushed it near three-month lows, as the dollar eased following reports that Iran offered to discuss terms for ending the war. The New York Times reported that, a day after US-Israel attacks began, operatives from Iran’s Ministry of Intelligence made an indirect approach to the CIA. Israeli officials, however, have advised Washington to disregard the overture for now. Investors also weighed the impact of rising energy costs on Bank of England policy. Markets now see just a 20% chance of a cut this month, down from 75% last week, and price only a single 25-basis-point reduction for the year. Meanwhile, the Office for Budget Responsibility lowered its 2026 UK growth forecast to 1.1% from November’s 1.4%, even before factoring in energy shocks, but projected stronger growth of 1.6% in both 2027 and 2028, alongside lower borrowing and inflation expectations.

Sterling fell below $1.34, touching its lowest since December 9, as a stronger US dollar drew safe-haven demand amid Middle East tensions, while investors reacted to Chancellor Rachel Reeves’ downgraded growth forecasts. US President Donald Trump said the military campaign against Iran could last four to five weeks but could be extended if needed. Meanwhile, surging energy costs following the Strait of Hormuz closure and suspended Qatari LNG exports, may push the Bank of England toward a hawkish stance. Domestic political and economic developments added to Sterling’s downward pressure. The Office for Budget Responsibility (OBR) lowered its UK growth forecast for 2026 to 1.1%, down from 1.4% projected in November, even before factoring in potential energy price shocks. However, the OBR revised its outlook for 2027 and 2028, projecting growth of 1.6% in both years. The agency also forecasted lower borrowing and inflation over the coming period.

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.