Sterling extends losses as Middle East conflict, UK political risks pressure pound

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Sterling dips on conflict, politics

Highlights

Sterling drops 0.20% to $1.34 after touching $1.3368, its lowest since May 18, while euro climbs 0.10% to 86.69 pence.
The dollar rises as investors shift to safe havens amid Iran's Revolutionary Guards hitting a U.S. airbase and uncertainty over the Strait of Hormuz.
UK political uncertainty from a potential Labour leadership challenge and Middle East conflict increase downside risk for the pound and upside for euro-sterling.

Currency moves and policy signals

As reported by Reuters, sterling falls 0.20% to $1.34 after touching $1.3368, its lowest level since May 18, while the euro rises 0.10% to 86.69 pence, its highest level since May 19.

The dollar edges higher on Thursday as investors seek safer assets after Iran's Revolutionary Guards hit a U.S. airbase and uncertainty persists over any deal to reopen the Strait of Hormuz. Investors are also shifting attention to the possibility of U.S. interest rate hikes.

Francesco Pesole, forex strategist at ING, says upside risks for euro-sterling remain because some political risk could be repriced. He adds that without a particularly hawkish European Central Bank or a dovish Bank of England, the pair may struggle to hold sustainably above 0.87 in the near term.

Traders fully price in two ECB rate hikes by the end of the year after hawkish comments from officials including chief economist Philip Lane, who says the energy shock caused by the U.S.-Israeli war on Iran is likely to have a persistent impact on inflation. Bank of England policymaker Alan Taylor says he sees less risk of second-round inflation from the Iran war than from Russia's 2022 invasion of Ukraine, while Governor Andrew Bailey says the central bank has time to assess the impact of the conflict.

UK political uncertainty adds pressure

Domestic political concerns are also weighing on the pound as potential rivals to Prime Minister Keir Starmer, including Greater Manchester Mayor Andy Burnham, begin positioning themselves for a possible leadership challenge that Starmer says he will fight.

Thierry Wizman, global forex and rates strategist at Macquarie Group, says the UK remains under a cloud of uncertainty because of the prospect of a Labour Party leadership contest. He says euro-sterling could rally further if better news emerges from the Persian Gulf, underscoring how both geopolitical developments and UK politics are now shaping the currency's direction.

Our earlier report on the Strait of Hormuz escalation explained how fading hopes of a near-term deal and fresh U.S.-Iran military incidents quickly rebuilt a risk premium in energy markets, pushing WTI above $91 and Brent near $97. We also noted that any sustained disruption risk to Hormuz—through which about a fifth of global oil and LNG typically flows—can amplify inflation pressures and shape broader investor positioning.

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