Sterling Weakens Amid Weak PMI and Middle East War Fallout

The British pound fell to $1.34 as investors reacted to weaker-than-expected PMI data and escalating Middle East tensions, raising fears of an energy shock. UK business activity growth slowed to its lowest level since September 2025, with the Iran war stalling growth and driving inflation sharply higher. Manufacturing cost growth accelerated at the fastest pace since Black Wednesday in 1992. Meanwhile, markets remained focused on developments in the war. On Monday, US President Donald Trump announced a five-day delay in planned strikes on Iran’s energy infrastructure, claiming that "positive talks" were underway, a claim Tehran dismissed, though reports suggested indirect negotiations. The recent surge in energy prices has led investors to increase bets on policy tightening this year, with markets now anticipating multiple Bank of England rate hikes, marking a stark reversal from pre-conflict expectations of two cuts.

The British pound recovered to $1.34, reversing earlier declines, after President Trump delayed US strikes on Iran for five days, citing "very good and productive" negotiations with Tehran. The announcement temporarily reduced fears of a Middle East escalation, just ahead of a 48-hour US deadline for Iran to reopen the Strait of Hormuz. However, Iran’s state-run Fars News Agency dismissed the claim, reporting no direct or indirect talks with the US and suggesting Trump’s retreat followed Iran’s threat to target all West Asian power plants. Despite the diplomatic reprieve, markets still price in a number of Bank of England rate hikes this year, a stark reversal from pre-conflict expectations of two cuts, as policymakers focus on taming inflation amid the UK’s vulnerability to energy supply shocks. Focus this week also turns to February CPI, retail sales, March PMI, and consumer confidence data, which could further shape the central bank’s response to the deepening crisis.

The British pound weakened further below $1.33 as investors piled into the US dollar, bracing for a potential escalation in the Middle East conflict. With a 48-hour US deadline for Iran to reopen the Strait of Hormuz expiring today, President Trump has threatened strikes on Iranian power plants if Tehran refuses. Iran’s vow to retaliate against Gulf energy and desalination infrastructure pushed Brent crude above $110 per barrel, deepening concerns over the UK’s exposure to imported energy disruptions. Markets now anticipate four BoE rate hikes in 2026, a dramatic shift from pre-war expectations of two cuts, as policymakers prioritize inflation control. Focus this week turns to February CPI, retail sales, March PMI, and consumer confidence data, which could further shape the central bank’s response to the deepening crisis.