The British pound fell against the dollar for the third consecutive day on Thursday, as escalating tensions in the Middle East and soaring energy prices drove funds towards the safe-haven dollar. Meanwhile, the market is reassessing UK inflation and interest rate paths. The pound was last reported at $1.3386, down about 0.2% on the day.
The core pressure on the pound remains the rising oil and gas prices. According to Reuters data, Brent crude oil briefly touched $100 per barrel on Thursday before retreating to around $98.45, while WTI was at $93.23. For an energy net-importing economy like the UK, this reignited concerns of imported inflation.
However, in relative terms, the pound is still outperforming some other currencies of importing economies. Since the escalation of the conflict on February 28, the pound has only fallen by about 0.7%, while the euro and the Korean won have dropped by 2% to 3%, and the Indian rupee and the Japanese yen have both fallen by over 1.5%. The euro has fallen by 1.3% against the pound over the same period, indicating that the euro is more heavily impacted by the energy shock.
The re-pricing in the rate market is also accelerating. Reuters reports that traders now see a nearly 50% chance of a rate hike by the Bank of England before December, whereas the market previously expected a rate cut. The yield on the UK's two-year government bonds has risen by about 50 basis points since the conflict began, an increase greater than that of other major bond markets. Bank of England Governor Bailey is also set to speak before next week's monetary policy meeting.
