The British pound weakened on Monday, falling to its lowest level in more than three weeks against the euro and heading for a fifth straight daily decline versus the U.S. dollar, as investors weighed the economic impact of the Iran conflict.
The dollar hovered near a 10-month high, with mixed signals from Iran and the United States dampening hopes of a swift resolution to tensions in the Middle East.
Despite the recent slide, sterling remains the best-performing major currency against the dollar since the conflict began in early March. Over the same period, the euro has dropped around 2.7%, while the Japanese yen has fallen about 2.4%.
However, analysts warn the pound is vulnerable due to the UK’s reliance on imported natural gas, persistent inflation and strained public finances — factors that have contributed to a sharper selloff in government bonds compared with other major economies.
Yields on 10-year UK government bonds, or gilts, were steady at around 4.98% after reaching 5.118% last week, their highest level since 2008.
The volatility has also prompted some pension funds to post additional collateral against hedging positions, although the impact so far has been far less severe than during the market turmoil that led to the resignation of former prime minister Liz Truss.
“Geopolitical developments have pushed UK politics to the background, but risks of a more expansionary fiscal policy have likely risen in the wake of the energy shock and with the upcoming May local elections,” Barclays strategists said in a research note.
Investors are also turning their attention to the upcoming local elections on May 7, with Keir Starmer’s governing Labour Party currently trailing both Reform UK and the Green Party of England and Wales in the polls, adding another layer of uncertainty to the market outlook.