Pound edges lower amid geopolitical uncertainty

The British pound slipped against the US dollar on Wednesday as a stalemate in peace talks aimed at ending the Iran war weighed on investor sentiment, while caution ahead of key central bank decisions further limited risk appetite.

Sterling was last down 0.15% at $1.3499, while it was largely unchanged against the euro at 86.65 pence.

The currency’s modest decline came despite a strong monthly performance, with the pound having recovered all losses triggered by the Iran war.

The currency is currently on track for a 2.1% gain in April, marking its strongest monthly showing since August last year.

However, ongoing geopolitical tensions and macroeconomic uncertainty have prompted investors to adopt a more cautious stance.

Focus shifts to central bank decisions

Market participants are closely watching monetary policy decisions from major central banks, particularly the US Federal Reserve and the Bank of England (BoE).

The Federal Reserve is scheduled to announce its interest rate decision later on Wednesday.

The central bank is widely expected to leave rates unchanged.

The meeting also carries added significance as it could potentially be Chair Jerome Powell’s final one before a likely leadership transition to Kevin Warsh.

Attention will then turn to the Bank of England, which is set to meet on Thursday.

Policymakers are also expected to hold interest rates steady.

However, investors will scrutinise the voting pattern within the Monetary Policy Committee (MPC) to assess whether market expectations for two rate hikes this year remain justified.

UK economic outlook weakens amid energy risks

The UK economy faces mounting challenges as the Iran war continues to disrupt global energy markets.

According to forecasts published by the National Institute of Economic and Social Research (NIESR) on Wednesday, Britain is likely to experience a sharp slowdown this year and in 2027.

The think tank also warned that inflation could remain above the Bank of England’s target until 2028, underscoring the long-term impact of elevated energy costs.

Bond yields provide some support to sterling

Despite recent pressure, sterling has remained relatively resilient compared to other major currencies. Since the start of the Iran war, the pound has posted a modest net gain of 0.2%, outperforming several peers.

The Norwegian crown has led gains with a 2.5% rise, followed by the Australian dollar, which is up 0.6%.

Analysts attribute part of sterling’s resilience to rising UK government bond yields.

Two-year gilt yields have surged by nearly a full percentage point since late February.

In comparison, equivalent yields in Germany and the United States have increased by 67 basis points and 47 basis points, respectively.

Overall, while sterling has demonstrated resilience in April, geopolitical uncertainty and central bank caution continue to influence short-term movements, keeping investors on edge.