LONDON, March 27 (Reuters) – The pound declined for a fourth straight day on Friday and is on track for its weakest monthly showing against the U.S. dollar since October, as concerns over a potential global energy shock tied to the Middle East conflict push investors toward the dollar as a safe haven.
Sterling has dropped about 1.5% in March, slightly more than its February decline, marking its worst monthly performance since last October.
Despite this, the pound remains the strongest-performing major currency against the dollar since the conflict began. In comparison, the euro has fallen roughly 2.5%, while traditional safe-haven currencies like the yen and Swiss franc have dropped 2.4% and 3.6%, respectively.
Expectations around interest rates have also shifted. Before the conflict, the Bank of England was expected to cut rates twice this year, but markets now anticipate up to three rate hikes. However, policymaker Alan Taylor said there is a high threshold for raising rates and suggested holding steady until the economic impact of the war becomes clearer. He recently voted, along with the rest of the Monetary Policy Committee, to keep rates unchanged, though some members warned hikes could still be possible.
Persistent inflation in the UK has led to heavier selling of government bonds, driving yields higher and offering some support to the pound. Two-year gilt yields – highly sensitive to inflation and rate expectations – have surged by nearly one percentage point since the conflict began, nearing their highest levels in about two and a half years.
Analysts at Bank of America noted that while sterling has shown resilience, sustained higher borrowing costs combined with slower growth could strain the UK’s fiscal position. With borrowing costs already among the highest in developed markets, Finance Minister Rachel Reeves faces growing pressure to maintain fiscal discipline with limited flexibility.
