LONDON, March 27 (Reuters) – The pound fell for a fourth
day on Friday, as it headed for its weakest monthly performance
against the dollar since October, as fears of a global energy
shock from the Middle East war have driven investors into the
U.S. currency as a safe haven.
Sterling has fallen by 1.5% in March, slightly more
than in February, making this its worst monthly performance
since last October.
But the pound is also the best performing currency against
the dollar since the war started. The euro is down around 2.5%
in that time, while the safe-haven yen and Swiss franc have lost
2.4% and 3.6%, respectively.
The Bank of England, which prior to the war had been
expected to cut rates twice this year, is now expected to
deliver as many as three hikes, according to money markets,
compared with expectations in a Reuters poll for no change in
2026.
Bank of England policymaker Alan Taylor said on Thursday
that he saw a high bar to hiking interest rates and it was
preferable to hold borrowing costs until there was greater
clarity on the impact on the economy from the war with Iran.
Taylor, who until the start of the conflict was a long-time
advocate for lower interest rates, voted this month to leave
them on hold, as did all the other eight members of the Monetary
Policy Committee, some of whom warned rate hikes could happen.
Given how much higher inflation is in Britain than in other
developed economies, UK government bonds have been sold more
aggressively, which has pushed up yields more quickly –
something that theoretically offers the pound some support.
Two-year gilt yields, which are the most sensitive to
expectations for inflation and interest rates, are up by almost
a percentage point since the war started, near their highest for
almost 2-1/2 years.
“Sterling remains largely resilient but higher borrowing
costs, if sustained, alongside weaker growth will inevitably
reduce fiscal headroom,” analysts at Bank of America, who
recommend selling the pound against the dollar, said in a note.
The UK’s borrowing costs are far higher than almost every
other developed-market economy and finance minister Rachel
Reeves is under pressure to keep the government’s finances on
track, given that she has limited room for manoeuvre.
