Sterling Under Pressure: Middle East Tensions and Domestic Woes Weigh on British Pound

The British pound continued its descent on Thursday after a brief respite, impacted by escalating tensions in the Middle East, provoking investor anxiety and a shift towards safe-haven alternatives. With oil prices rising for the fifth consecutive day, currencies of economies reliant on energy imports, like the pound, faced significant selling pressure.

Sterling dropped 0.1% against the dollar to $1.3362 and also declined slightly versus the euro. Both the euro and the yen experienced sell-offs against the strengthening dollar, driven by increased safe-haven demand. "There's considerable complexity and uncertainty, which supports the stronger dollar," noted Nick Rees, head of macro research at Monex.

Expectations for a Bank of England rate cut have diminished, with LSEG data indicating only a 22% likelihood of easing this month, down from 75% last Friday. "Without rapid de-escalation in the Middle East, we doubt the Bank will cut rates on March 19 as previously anticipated," mentioned Ruth Gregory, deputy chief UK economist at Capital Economics.

Compounding the issue are domestic factors, including sluggish UK economic growth in the final quarter of last year. Political pressures are mounting following Prime Minister Keir Starmer's Labour Party losing a local election in Manchester, along with criticism over his stance on international relations. Additionally, finance minister Rachel Reeves provided a budget update showing lower inflation and borrowing than expected, but forecasts slowed UK economic growth, partially due to Middle East instability being excluded from current projections.