Sterling slides as dollar strength and war risks weigh

The British pound weakened on Monday, falling to its lowest level in more than three weeks against the euro and extending losses against the US dollar, as investors assessed the economic fallout from the Iran war.

Sterling was down 0.15% at $1.324, marking its fifth consecutive daily decline against the dollar.

The Euro rose 0.11% to 86.83 pence after touching its highest level since March 6, while the US Dollar hovered near a 10-month high.

The pound has now lost 1.67% in March, reflecting mounting pressure from both global and domestic factors.

Dollar strength and rate divergence drive moves

Currency markets remain heavily influenced by the strength of the dollar, which has benefited from rising geopolitical tensions and shifting expectations around interest rates.

While sterling has held up relatively well since the Iran conflict began earlier this month, it remains vulnerable.

Over the same period, the euro has fallen about 2.7% against the dollar, while the Japanese yen has declined roughly 2.4%.

A key factor weighing on sterling is divergence in monetary policy expectations.

Markets anticipate that the European Central Bank could raise interest rates as soon as April, while the Bank of England is expected to delay rate cuts, creating uncertainty around the UK’s rate trajectory.

Rising bond yields add pressure

UK government bonds have also come under strain.

The yield on 10-year gilts stood near 4.98% after spiking to 5.118% last week, its highest level since 2008.

The selloff in bonds has had knock-on effects across financial markets.

Some British pension funds have been required to post additional collateral against hedging positions.

However, the situation remains less severe than the turmoil seen during the 2022 crisis that led to the resignation of former Prime Minister Liz Truss.

Strategists point to the UK’s reliance on imported natural gas, persistent inflation, and stretched public finances as structural vulnerabilities that have amplified market reactions.

Political and economic headwinds build

Domestic factors are adding to the cautious outlook.

Analysts at Barclays said geopolitical tensions have overshadowed UK-specific issues but warned that fiscal risks could rise ahead of upcoming elections.

Investors are closely watching the May 7 local elections, where Prime Minister Keir Starmer’s Labour Party is reportedly trailing rivals, including Reform UK and the Green Party.

Recent economic data has also weakened sentiment.

UK business activity expanded at its slowest pace in six months, manufacturing input costs rose at the fastest rate since 1992, and retail sales declined—highlighting growing pressure on the domestic economy.