Sterling resumes retreat as middle east conflict prompts flight to safe havens

Sterling Falls Further as Middle East Conflict Boosts Safe Haven Flows

Market Reactions and Economic Implications

By Niket Nishant

Impact of Middle East Conflict on Currency Markets

LONDON, March 5 (Reuters) - The British pound resumed its fall on Thursday, following a one-day reprieve, as the deepening conflict in the Middle East kept investors nervous and fuelled a flight to safe-haven alternatives. 

With oil prices rising for a fifth consecutive day, investors continued selling currencies of economies reliant on energy imports. 

Sterling dipped 0.1% against the dollar to $1.3362, and was a touch lower versus the euro at 86.91 pence. The euro and the yen also sold off against the dollar, which was gaining on safe-haven demand.

Analyst Perspectives on Market Uncertainty

"There's a lot of moving parts here, and there's a lot of uncertainty, and that favours a stronger dollar," said Nick Rees, head of macro research at Monex.

Bank of England Policy Outlook

Traders have scaled back expectations for a Bank of England rate cut, with LSEG data showing just a 22% chance of easing this month, down from 75% on Friday.

Inflation Risks and Rate Cut Expectations

"Unless tensions in the Middle East swiftly de-escalate, we doubt the Bank will cut rates on March 19 as we previously thought," said Ruth Gregory, deputy chief UK economist at Capital Economics. 

"The risk is that higher inflation delays rate cuts this year or prevents rates from being cut at all."

Domestic Factors Affecting Sterling

Economic Growth and Political Pressures

DOMESTIC FACTORS WEIGH

Domestic factors have also soured sentiment towards the pound, as data last month showed sluggish economic growth in the UK in the final quarter of last year.

Political pressures are in focus after Prime Minister Keir Starmer's Labour Party lost a local election in Manchester. He has also faced criticism over his stance on the U.S.-Israel war with Iran.

Budget Update and Future Projections

Earlier this week, British finance minister Rachel Reeves delivered a budget update that showed that inflation and borrowing would be lower than expected. 

However, she also forecast slower economic growth for this year, citing the latest projections from ​the Office for Budget Responsibility.

"Much of the good news centred on the country's lower borrowing costs. But crucially the OBR projections do not take into account any further instability in the Middle East," said Mark Preskett, senior portfolio manager at Morningstar Wealth.

"Britain remains sensitive to energy-induced inflation, given our reliance on oil and gas imports."

(Reporting by Niket Nishant; Editing by Kirsten Donovan)