The Pound paused on Wednesday after its longest winning streak in a year, slipping against the Dollar as renewed investor optimism over a potential resolution to the Iran war pushed the safe-haven US currency to a six-week low.
However, analysts warned that Sterling’s recent strength may be temporary, as the conflict has clouded the outlook for UK growth and inflation.
The International Monetary Fund delivered the steepest growth downgrade among major advanced economies, cutting the United Kingdom’s 2026 forecast to 0.8% from 1.3%, the largest reduction for any G7 economy, citing the impact of the Iran war.
Sterling was trading flat at $1.357 at the time of writing, after rising almost uninterrupted by 3% since hitting a four-month low at the end of March. The currency had risen for seven consecutive sessions, its longest winning streak since a 10-day run last April.
The United Kingdom’s reliance on imported natural gas has left it particularly exposed, with prices surging around 40% since the start of the war.
This has pushed up government borrowing costs, with two-year gilts becoming the worst-performing among major economies, rising nearly 70 basis points since late February to 4.2%.
As a result, traders had quickly priced in expectations of Bank of England rate hikes this year. However, as optimism builds around a potential easing of disruptions to oil flows through the Strait of Hormuz, some of that tightening has been scaled back, which analysts say could leave Sterling vulnerable to renewed declines, Reuters news agency reports.
“All in all, the latest developments keep us confident with our call that front-end rates have further to fall in the UK than the eurozone and that should offer lasting support to Euro/Sterling beyond the near-term,” according to ING strategist Francesco Pesole.
“…The pair is suffering a bit from improved risk sentiment, but rate differentials will return as primary drivers once the dust has settled.”
The Euro remains down nearly 1% against the Pound since the start of the war, and was unchanged on Wednesday at 86.94 pence.
Meanwhile, Megan Greene, one of the Bank of England officials most concerned about inflationary pressures even before the conflict, said on Tuesday that it may take months to assess the full, lasting impact of the energy price shock on the UK economy. She added that upside risks to inflation remain “paramount” in her assessment.
“We can’t wait to have all the definitive data showing that there are second-round effects because then we will be too late already, so it will have to be a judgment call,” she said.