Pound Weakens, Risk-Off and Hormuz Boost USD Demand
The pound weakened on Monday morning in Europe, with GBP/USD falling to around 1.3315 as the US dollar strengthened as a safe-haven asset. Markets held their positions ahead of the release of preliminary UK and US PMI data scheduled for Tuesday, which could potentially impact growth and interest rate expectations.
The main driver of the pound's weakness came from the escalation of the war in the Middle East, which lifted oil prices. Brent oil returned above US$100 per barrel, fueling growing global inflation concerns and boosting demand for the dollar. Iran also threatened retaliation in the region if US President Donald Trump carried out his threat to bomb Iranian power plants, after Trump gave a 48-hour deadline for the Strait of Hormuz to be fully opened to shipping.
In the UK, the Bank of England held interest rates at 3.75% last week but warned that the economic "shock" from the war was likely to push UK inflation up in the short term. At the same time, its 2026 growth projection was cut, reinforcing signs that the economy faces a trade-off between inflation and growth.
Disappointing labor market data also weighed on the pound, including a rise in the unemployment rate, which reduced market participants' confidence in the resilience of the domestic economy. The combination of energy inflation and signs of a labor slowdown narrowed policy room for maneuver and increased the GBP's sensitivity to a strengthening dollar.
The UK government stated that Prime Minister Keir Starmer, Bank of England Governor Andrew Bailey, and Chancellor of the Exchequer Rachel Reeves would attend an emergency meeting on Monday to discuss the economic impact of the Iran war. This agenda suggests a policy focus on mitigating energy shocks and stabilizing inflation expectations.
Going forward, the direction of GBP/USD will be guided by three factors: the path of oil prices and Hormuz risks, the UK-US PMI results as an indicator of activity, and how the market prices the BoE's response to energy inflation. As long as global sentiment is risk-off and the dollar remains sought after, the pound's strength has the potential to remain limited.
Source: Newsmaker.id
