Sterling Drops Again as Middle East Tensions and UK Politics Weigh on Pound
Market Reactions and Political Influences on the Pound
By Stefano Rebaudo
May 28 (Reuters) - Sterling slipped for a third straight day against both the euro and the dollar, as investors focused on Middle East tensions and lingering domestic political concerns.
Middle East Tensions Impact Global Markets
Iran's Revolutionary Guards hit a U.S. airbase on Thursday, hours after U.S. President Donald Trump rejected a report that Washington was close to a deal with Tehran.
The dollar edged higher on Thursday, supported by safe-haven demand amid doubts over a deal to reopen the Strait of Hormuz, while investors shifted their focus to possible U.S. interest rate hikes.
Sterling’s Performance Against Major Currencies
The pound dropped 0.20% to $1.34 after hitting $1.3368, its lowest level since May 18.
“Overall, upside risks for euro/sterling remain, as some political risk could be repriced,” said Francesco Pesole, forex strategist at ING, after arguing that the market has recently priced out such a risk.
UK Political Uncertainty and Leadership Concerns
Potential rivals to British Prime Minister Keir Starmer, like Greater Manchester Mayor Andy Burnham, started positioning themselves for a possible leadership challenge that Starmer has said he will fight.
“However, absent a particularly hawkish ECB or a dovish Bank of England, the pair may struggle to trade sustainably above 0.87 in the very near term,” Pesole added.
Central Bank Policies and Inflation Outlook
Traders fully priced in two European Central Bank rate hikes by the end of the year following hawkish remarks from ECB officials, including chief economist Philip Lane, who on Thursday said the energy shock caused by the U.S.-Israeli war on Iran would likely have a persistent impact on inflation.
BoE policymaker Alan Taylor said last week he saw less risk of second-round inflation from the Iran war than from Russia’s 2022 invasion of Ukraine, while Governor Andrew Bailey said the central bank has time to gauge the impact of the Iran war.
Euro Strengthens Against Sterling
The euro was 0.10% higher at 86.69 pence, its highest level since May 19.
“Still, with the UK under a cloud of uncertainty due to the prospect of a coming leadership election in the Labour Party, we suspect that the euro/sterling would rally if better news emits from the Persian Gulf,” said Thierry Wizman, global forex and rates strategist at Macquarie Group.
(Reporting by Stefano Rebaudo; Editing by Thomas Derpinghaus)
