Sterling Slides as Middle East Tensions Rattle Markets

The British pound dipped toward $1.33 as risk aversion surged amid ongoing US-Iran tensions. President Trump claimed Iran seeks a deal but "fears admitting it," while Iranian state media rejected negotiations, instead pushing for unilateral guarantees, including potential fees for ships passing through the Strait of Hormuz. Oil prices soared, with Brent nearing $105/barrel and poised for its largest monthly gain since 1990. UK consumer confidence plunged in March, hitting record lows as the conflict stoked inflation fears. Markets now anticipate two to three Bank of England rate hikes, with a 70% chance of a move next month and a second fully priced in by July.

The British pound held firm near $1.34 on hopes of de-escalation in the Middle East conflict, with reports indicating Washington proposed a 15-point peace plan to Tehran following a potential one-month ceasefire. Iran dismissed involvement in negotiations, stating, "No one can trust US diplomacy." In the UK, February’s inflation data showed consumer prices unchanged at 3%, matching forecasts, while core CPI edged up to 3.2%, slightly above the expected 3.1%. However, the figures, which predate the Middle East conflict, had little market impact. Investors now anticipate only two Bank of England rate increases by year-end, down from earlier forecasts of three, as easing oil prices reduce concerns over inflationary pressures from high energy costs.

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.