Pound Sterling spent the past week adrift as traders positioned for a possible U.S. attack on Iran and sought shelter in safe‑haven assets such as the Swiss Franc.
With risk appetite fading, the pound weakened to about $1.345, heading for its second weekly decline, and slid towards 1.14 against the euro.
Pound to Euro (GBP/EUR): 1.14009 (-0.26%)
Pound to Dollar (GBP/USD): 1.34699 (-0.16%)
Euro to Dollar (EUR/USD): 1.18147 (+0.1%)
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The decline gathered pace after Britain’s governing Labour Party was trounced by the Greens in a by‑election in Greater Manchester, a result that fuelled speculation over Prime Minister Keir Starmer’s leadership.
Francesco Pesole of ING warned that anything undermining Starmer’s position could weigh further on sterling, while the success of a more left‑wing party might embolden calls for a more radical successor.
The pound’s soggy tone has been compounded by expectations that the Bank of England will begin cutting interest rates as soon as March.
GBP/USD year-ahead forecast: Median, range and upside/downside risks based on projections from 20+ investment banks and FX analysts.View forecasts
Governor Andrew Bailey has acknowledged that the March decision is a “genuinely open question” because services inflation remains stubborn, but falling GDP and rising unemployment have tilted market pricing toward cuts.
Traders will also parse comments from BoE chief economist Huw Pill later today; markets currently see around 50 basis points of easing by year‑end.
Broader geopolitical jitters have sent investors fleeing into the U.S. dollar and gold.
The greenback firmed against most peers after U.S. producer price inflation came in hotter than expected and as markets fretted that nuclear talks between Washington and Tehran might fail.
Traders have been bracing for potential U.S. strikes on Iranian nuclear sites after President Donald Trump warned that “really bad things” would occur if no deal is reached within 10‑15 days.
An Omani mediator has said negotiators made progress, but diplomats concede there is no breakthrough and urge both sides to keep talking.
Iran’s delegation has demanded sanctions relief in exchange for curbs on enrichment. With time running out, markets fear a sudden military escalation.
Those anxieties have been felt across assets.
Brent crude rallied as much as 3 % this week as traders priced in the risk of supply disruptions through the Strait of Hormuz.
Tamas Varga of PVM said “uncertainty prevails” and fear is pushing prices higher, while Suvro Sarkar of DBS reckons an $8-$10 per barrel war premium is now embedded.
Prices eased slightly after reports that talks will continue next week, but the risk premium remains.
Rising oil costs add to sterling’s woes because the UK is a net energy importer.
Gold has been one of the week’s big winners.
The precious metal climbed to a near‑one‑month high around $5,239 per ounce as demand for safe havens spiked.
Phillip Streible at Blue Line Futures said nervousness about geopolitics and a “high probability of military operation over the weekend” drove the rally.
Gold has gained every month since July and stands well above the psychologically important $5,000 level. Spot silver and platinum have also firmed as investors diversify their safe‑haven exposure.
GBP/EUR year-ahead forecast: Median, range and upside/downside risks based on projections from 20+ investment banks and FX analysts.View forecasts
Dollar, yen and yuan: the other side of the trade
The haven bid has benefitted the U.S. dollar, but its gains have been tempered by mixed economic signals.
The dollar index was little changed at around 97.65 after traders unwound some positions on the view that January’s price pressures may be temporary.
China’s central bank added a twist by scrapping its 20 % risk‑reserve requirement on FX forward contracts to slow the yuan’s rise.
By lowering hedging costs, officials hope to encourage dollar buying and support exporters feeling the pinch from a rally of about 7 % in the renminbi since last April.
Analysts at Orient Futures noted that the move signals discomfort with the yuan’s rapid appreciation but is unlikely to reverse the trend.
Maybank added that reducing the charges for shorting the yuan makes it less punitive for market participants to bet against the currency.
Japan’s currency has also been under scrutiny.
Finance minister Satsuki Katayama told parliament the government is monitoring the yen’s recent slide with “a strong sense of urgency” and said Tokyo is in close communication with Washington to ensure concerns about the currency do not materialise.
The yen nevertheless edged higher on Friday, rising to around ¥156.07 per dollar as investors sought safety.
In emerging markets, the Indian rupee logged its first monthly gain since April 2025 as foreign portfolio inflows and a new US-India trade deal lifted sentiment.
The currency strengthened roughly 1% in February but remains volatile; traders note the boost faded after the U.S.
Supreme Court struck down President Trump’s global tariffs and investors fretted about artificial intelligence’s effect on India’s IT sector.
Intermittent interventions by the Reserve Bank of India have prevented a breach of the ₹91 per dollar level.
Bank strategists say the pound’s outlook hinges on politics and the war premium.
In a MUFG note, analyst Lee Hardman said the pound hit a year‑to‑date low against the euro after Labour’s by‑election defeat and warned that speculation about Starmer’s future could deepen the sell‑off.
MUFG flagged Middle East risks and China’s currency policy as other key drivers, noting that negotiations between the U.S. and Iran have kept oil prices elevated while the renminbi’s surge has buoyed commodity currencies.
Hardman said the pound may find support if a leadership challenge is deferred until after May’s local elections. With the U.S. dollar still seen as the least ugly currency in a fraught world, and yields on safe U.S. Treasuries attractive, sterling may struggle to mount a durable rally.
