The Pound to Dollar (GBP/USD) exchange rate is trading around 1.3239 while the Pound to Euro (GBP/EUR) rate has held near 1.1469, with Sterling struggling to regain ground after losses over the past two weeks.
Lloyds warns that the Iran war has created a difficult backdrop for the Pound, with higher energy prices threatening another inflation shock at a time when UK growth is already fragile.
The bank notes that rate markets have shifted sharply, moving from expecting Bank of England cuts to pricing the risk of further tightening.
Lloyds, however, considers that higher rates and higher energy costs are a toxic mix for the UK economy, increasing pressure on growth, government finances and consumer demand.
Although the bank does not expect a repeat of the post-2022 inflation shock, it still sees a poor overall backdrop for Sterling as tighter financial conditions are likely to weaken growth and push inflation lower further ahead.
In this context, Lloyds continues to favour selling Sterling against the Euro, Norwegian krone and Australian dollar.
“Short Sterling versus EUR, NOK and AUD remain our preferred ways to express that.”
