The Pound fell on Tuesday as early optimism over a potential Iran peace agreement faded following US strikes on Iranian targets and remarks from Secretary of State Marco Rubio suggesting negotiations may still take several days.
Sterling was down 0.2% at $1.348 at the time of writing, after rising 0.6% on Monday on hopes that a deal could end the conflict and reopen the strategic Strait of Hormuz. Meanwhile, the Euro gained 0.2% against the Pound, reaching 86.36 pence.
Markets have been reacting to mixed signals on the negotiations in recent days, much like throughout the wider conflict, Reuters reports.
On Saturday, US President Donald Trump said a deal was “largely negotiated,” but he softened that stance the next day. More recently, Marco Rubio said on Tuesday that reaching an agreement could still “take a few days,” dampening expectations of an immediate resolution to the conflict.
Sterling has fluctuated over the course of the war, mainly as investors shifted between risk-sensitive assets and the safe-haven US Dollar in response to developments in peace negotiations.
It is currently broadly unchanged against the greenback since the conflict began, although it has gained more than 1% against the Euro over the same period.
Politics has also played a role in the performance of the British currency, which dropped after the 7th May local elections as investors anticipated a possible internal challenge to Prime Minister Sir Keir Starmer from within the Labour Party, before recovering in the following days.
The possibility of a leadership challenge from Andy Burnham has contributed to the political headlines, although expectations remain that any outcome would likely result in only modest changes to fiscal policy.
Once the Iran conflict comes to an end, the outlook for the Pound is expected to improve.
In the near term, GBP/USD may remain under pressure due to UK political uncertainty and elevated oil prices, but a recovery is anticipated as these risks ease, oil markets stabilise, and stronger economic data provide support for Sterling.
The UK economy grew by 0.6% in the first quarter of the year, although analysts have suggested the figure may have been influenced by seasonal adjustment effects.
However, more recent data has indicated emerging weakness, including a decline in retail sales and evidence that UK employers are reducing hiring.