LONDON: The pound edged higher against the dollar on Tuesday as hopes of a de-escalation in the Middle East conflict pushed oil prices lower and eased inflation concerns for Britain’s import-dependent economy.
Sterling rose 0.1% to $1.3454 against the dollar. It was a touch lower versus the euro at 86.52 pence.
“The UK fundamentals are pretty poor, but in these situations you tend to see that a shakeout is followed by a recovery as investors rebalance,” said Nick Kennedy, FX strategist at Lloyds.
The currency has lost 0.3% against the dollar so far this month.
Given the far-reaching implications for the global economy, investors remain on edge and are scanning for even the smallest signs of relief in the conflict involving the U.S., Israel and Iran.
However, conflicting signals from Washington and Tehran prompted analysts to urge caution.
While U.S. President Donald Trump hinted that the war may end sooner than his initial timeline, Iran’s Revolutionary Guards were defiant, saying they would not let oil shipments through the Strait of Hormuz until attacks from the U.S. and Israel stop.
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Standard Chartered and Morgan Stanley now expect the Bank of England to cut interest rates in the second quarter, delaying earlier forecasts.
Elsewhere, the euro inched up against the dollar at $1.1639, while the yen was flat at 157.77 per dollar.
Domestic risks remain
Beyond the hit from higher oil prices, the pound has also been weakened by subdued economic data and domestic political turbulence in recent weeks.
“With focus squarely on the Middle East, UK domestic issues have taken a back seat,” BofA Securities’ strategists wrote.
“However, with the May local elections barely two months away, we think markets are underpricing a renewed rise in domestic political uncertainty.”
British government bonds also looked to reclaim some ground after Monday’s plunge.
The yield on the two-year gilt, which moves inversely to prices, fell 6 basis points after climbing 10.7 bps in the previous session.
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