Pound weakens amid geopolitical tensions and energy price surge

The British pound declined against a broadly stronger US dollar on Monday as escalating geopolitical tensions between the United States and Iran  heightened market uncertainty.

The move followed the breakdown of talks between Washington and Tehran, with US President Donald Trump announcing that the US Navy would begin blockading the Strait of Hormuz.

The decision came after both sides failed to reach an agreement to end the war, putting a fragile two-week ceasefire at risk.

According to the US Central Command, forces would begin implementing the blockade of all maritime traffic entering and exiting Iranian ports from 10 am ET on Monday.

The development intensified concerns over global energy supplies, given the strategic importance of the Strait of Hormuz.

Sterling is pressured by energy exposure

Sterling has historically weakened against the dollar during periods of heightened tension between the US and Iran, reflecting Britain’s reliance on energy imports and its economic sensitivity to rising fuel costs.

Tommy von Brömsen, FX strategist at Handelsbanken, said, "Even if we get a resolution to the war ... we're still likely to see lingering higher energy prices.

" He added, "I think the pound and the euro are not in a very good seat right now."

The pound was last down 0.2% at $1.3429, after gaining more than 2% in the previous week, its strongest weekly performance since March 2025.

Against the euro, sterling remained largely unchanged at 87.02 pence.

Energy price surge fuels inflation concerns

The escalation in Middle East tensions has driven a sharp rise in energy prices, adding to inflationary pressures and raising concerns about global economic growth.

Brent crude futures climbed around 8% on Monday, trading above $102.50 per barrel.

Higher oil prices have prompted money market traders to reassess their expectations for UK monetary policy.

Markets are now pricing in potential interest rate hikes from the Bank of England, even as most brokerages do not anticipate any increase in borrowing costs in 2026.

Bank of England outlook under scrutiny

Bank of England Governor Andrew Bailey had earlier cautioned that markets might be overestimating the likelihood of rate increases, suggesting that expectations may be premature.

However, recent developments in energy markets have complicated the outlook.

Money market futures currently imply nearly two quarter-point rate hikes in 2026, a notable shift from earlier expectations before the conflict, when investors had anticipated two rate cuts within the year.

Moyeen Islam, senior sterling rates strategist at Barclays, said, "The deterioration due to rising energy prices that you've seen in inflationary conditions, or short-term expected inflationary conditions, by the end of the year looks materially worse than it was."

He added, "I find it hard to think back that we can row back to pricing in cuts for 2026."

Market sentiment remains fragile

The combination of geopolitical risk, rising energy costs, and shifting monetary policy expectations has left the pound vulnerable in global currency markets.

With uncertainty surrounding both the duration of the conflict and its economic fallout, investors remain cautious about sterling’s near-term trajectory.