FX.co ★ Sterling Slides Amid Middle East Tensions

Sterling weakened toward $1.33, its lowest level since December 9, as a stronger US dollar attracted safe-haven flows amid escalating tensions in the Middle East and investors digested downgraded UK growth projections from Chancellor Rachel Reeves. US President Donald Trump indicated that the military campaign against Iran could last four to five weeks, with the possibility of being extended if necessary. At the same time, surging energy prices following the closure of the Strait of Hormuz and the suspension of Qatari LNG exports may push the Bank of England toward a more hawkish policy stance.

Domestic political and economic developments further pressured the pound. The Office for Budget Responsibility (OBR) cut its forecast for UK growth in 2026 to 1.1%, down from 1.4% in its November projection, even before accounting for potential energy price shocks. However, the OBR revised up its outlook for 2027 and 2028, now expecting growth of 1.6% in both years. The agency also projected lower borrowing and inflation over the forecast horizon.