The British pound has come under significant selling pressure, underperforming against major global peers as escalating geopolitical tensions between the United States and Iran trigger widespread risk aversion and economic uncertainty. The currency fell to multi-week lows following the breakdown of talks between Washington and Tehran, with US President Donald Trump announcing a US Navy blockade of the Strait of Hormuz, a critical global oil shipping lane, effective from 10 am ET on Monday.
The move has intensified concerns over global energy supplies, driving Brent crude futures up around 8% to trade above $102.50 per barrel. This sharp rise in energy prices is adding to inflationary pressures and complicating the monetary policy outlook for import-dependent economies like the United Kingdom.
Sterling's vulnerability is pronounced. The GBP/USD pair declined approximately 1.8% since the conflict escalation began, with the pound last down 0.2% at $1.3429. It also fell 1.2% against the euro and nearly 2.1% against the Swiss Franc. Analysts attribute this underperformance to the UK's substantial energy import dependency—importing about 40% of its natural gas—its role as a global financial center sensitive to risk-off sentiment, and its trade relationships with the region.
Financial institutions are reassessing the situation. "Even if we get a resolution to the war ... we're still likely to see lingering higher energy prices," said Tommy von Brömsen, FX strategist at Handelsbanken. "I think the pound and the euro are not in a very good seat right now." The energy price surge has prompted money market traders to price in nearly two quarter-point interest rate hikes from the Bank of England in 2026, a stark reversal from earlier expectations of two rate cuts.
Bank of England Governor Andrew Bailey had previously cautioned that markets might be overestimating the likelihood of rate increases. However, Barclays senior sterling rates strategist Moyeen Islam noted, "The deterioration due to rising energy prices that you've seen in inflationary conditions... looks materially worse than it was. I find it hard to think back that we can row back to pricing in cuts for 2026."
Historical precedents suggest a pattern: during the 2014-2016 Middle East conflicts, sterling declined 9.3% against the US dollar over six months. Current projections vary, with analysts predicting a potential 50% recovery of losses within a quarter if there's a short-term resolution, but an additional 3-5% depreciation under a prolonged conflict scenario. The combination of geopolitical risk, rising energy costs, and shifting monetary policy expectations has left the pound's near-term trajectory highly uncertain.
