The British pound steadied at $1.3286 on Wednesday, following a sharp 0.67% drop the previous day as escalating tensions in the Middle East drove investors toward safe-haven assets like the U.S. dollar. The pound remains around 1% below a two-and-a-half-year high reached last Thursday.
Market Reaction to Middle East Tensions
The recent slide in sterling was fueled by geopolitical concerns after Iran fired ballistic missiles at Israel, sparking fears of a broader conflict in the oil-rich region. The dollar gained strength as investors sought safety amidst the uncertainty. The situation, combined with Israel’s incursion into Lebanon, kept markets on edge as investors waited to see whether the violence would intensify or remain a temporary flare-up.
View this post on Instagram
Matthew Ryan, head of market strategy at Ebury, noted that sterling’s decline was mainly driven by the rising Middle East tensions and recent hawkish comments by U.S. Federal Reserve Chair Jerome Powell, which reinforced demand for the U.S. currency.
Israel Strikes Heart Of Central Beirut, Bans UN Secretary General From Entering Israel
Currency Movements and Economic Outlook
While sterling held steady against the dollar, it remained flat against the euro at 83.29 pence per euro. However, it strengthened by 0.6% against a weakening yen, trading at 191.80 yen per pound.
Looking ahead, markets are focused on upcoming U.S. jobs data due on Friday, which could provide insights into the strength of the U.S. economy and influence the Federal Reserve’s future policy moves.
BoE and Rate Cut Speculation
In the UK, data showing that pay settlements have held at a two-year low is seen as a positive sign for the Bank of England (BoE), which is navigating high inflation. The BoE, which began cutting its key interest rate in August, is expected to proceed more cautiously with additional rate cuts compared to its U.S. and European counterparts.
Money markets are currently pricing in 36 basis points of rate cuts by the end of the year, indicating a potential 25 basis point reduction and a 45% chance of another.
With several BoE officials, including Chief Economist Huw Pill, set to speak later this week, markets will be listening closely for signals on the central bank’s future policy direction. Ryan expects BoE officials to strike a cautious tone, supporting the view of gradual rate cuts over time.
