Sterling Nears 1% Monthly Drop on Middle East Jitters

The British pound drifted toward $1.32, lingering near its lowest since early December and on track for a monthly decline of over 1% against the US dollar. Risk aversion dominated markets as traders assessed the economic risks from the protracted Middle East conflict, with reports of US troop preparations for a potential ground operation overshadowing Washington’s claims of progress in Iran negotiations. Meanwhile, Bank of England policy expectations underwent a dramatic shift: markets now anticipate at least two rate hikes in 2026, with a possible third, reversing earlier bets on two cuts. Meanwhile, BoE policymaker Alan Taylor struck a cautious tone last week. He emphasized a "high bar" for rate increases, advocating to hold borrowing costs steady until the economic impact of the Iran conflict becomes clearer.

The British pound edged toward $1.33 as traders assessed the latest in US-Iran negotiations, including a 10-day extension of Trump’s deadline to April 6, and fresh economic signals. While Tehran rejected US ultimatums and warned of retaliation, German Foreign Minister Johann Wadephul confirmed indirect contacts and upcoming direct talks in Pakistan. Yet, the subdued market response suggests skepticism over a near-term deal, with President Trump seen as using the delay to deploy more troops to the region. Bank of England policy expectations have reversed sharply this month: traders now anticipate at least two rate hikes this year, with a possible third, after previously pricing in two cuts. Domestically, UK retail sales fell 0.4% in February, less than expected, but consumer confidence hit a near one-year low in March, reflecting growing unease over the conflict’s toll on inflation and economic growth.

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.