Sterling weakens amid uncertainty over Iran conflict and UK politics

The British pound weakened on Tuesday as investor optimism surrounding a possible Iran peace agreement faded following recent US attacks on Iranian targets and comments from US Secretary of State Marco Rubio suggesting negotiations could take more time.

Sterling was last down 0.2% against the US dollar at $1.348 after gaining 0.6% on Monday.

The earlier rally had been driven by hopes of a deal that could end the conflict and reopen the Strait of Hormuz, a key global shipping route.

Meanwhile, the euro rose 0.2% against the pound to 86.36 pence.

Markets react to conflicting Iran headlines

Currency markets have continued to react sharply to developments surrounding the Iran conflict, with investors responding to changing signals about the progress of negotiations.

On Saturday, US President Donald Trump said a deal was “largely negotiated.”

However, he later softened those remarks the following day, adding further uncertainty to market sentiment.

The pound has fluctuated throughout the conflict as investors moved in and out of the US dollar, which is traditionally viewed as a safe-haven currency during periods of geopolitical uncertainty.

Despite the recent volatility, sterling has remained broadly unchanged against the dollar since the conflict began on February 27.

However, the pound has appreciated more than 1% against the euro during the same period.

UK political uncertainty adds pressure

Domestic political developments have also weighed on Britain’s currency in recent weeks.

Sterling weakened after the May 7 local elections as investors assessed the possibility of a political challenge to Prime Minister Keir Starmer from within the Labour Party.

The currency has since recovered some of those losses in recent sessions.

In a note to clients, UBS currency strategists Constantin Bolz and Dominic Schnider said headlines surrounding Manchester Mayor Andy Burnham had contributed to investor concerns.

“The prospect of a leadership challenge from (Manchester mayor) Andy Burnham has added to the headlines, but we expect only limited fiscal policy change regardless of the outcome,” Bolz and Schnider said.

The strategists added that the outlook for sterling could improve once uncertainty linked to the Iran conflict eases.

“While GBPUSD may stay subdued in the short term due to UK political noise and high oil prices, we expect a recovery as uncertainty fades, oil prices normalize, and robust economic data support the pound,” they said.

Economic data presents a mixed picture

Economic data from the UK has also shaped market sentiment around sterling.

The UK economy expanded by 0.6% in the first quarter of the year.

However, analysts noted that the figures may have been influenced by seasonal adjustments.

More recent economic indicators have pointed to signs of weakness in the British economy.

Data released last week showed UK employers reducing hiring activity, while retail sales also declined.

The weaker data has added to concerns about the near-term outlook for the UK economy, contributing to cautious sentiment around the pound.