British Pound declines as risk-off mood prevails on Middle East tensions

GBP/USD extends its losses for the second successive day, trading around 1.3390 during the Asian hours on Wednesday. The pair depreciates as the US Dollar (USD) receives support from increased risk aversion stemming from the Middle East conflict.

Bloomberg reported on Tuesday that US President Donald Trump recently threatened to resume attacks on Iran in two or three days as part of a push for a deal to end the war. This came after a brief pause in planned hostilities following a new proposal by Tehran to end the US-Israeli conflict. Meanwhile, an Iranian official stated that the US threat of a massive assault would be met resolutely, asserting that Iran is fully prepared to confront any military aggression.

Federal Reserve Bank of Philadelphia President Anna Paulson noted that current policy is mildly restrictive, which is helping to keep inflation pressures in check while maintaining a stable labor market. Paulson indicated that the current policy rate is suitable for applying downward pressure on inflation, though an appropriate rate increase remains possible if economic growth exceeds potential or if new inflation threats arise.

The UK unemployment rate rose slightly to 5% in the three months to March from 4.9% in the three months to February. Analysts noted that these figures show the first effects of the Middle East war on the jobs market, warning that demand for workers will likely continue to weaken the longer the conflict goes on.

The British Pound (GBP) remains subdued due to a rise in UK unemployment, combined with slowing wage growth, which will provide the Bank of England (BoE) with more time to assess the situation. Consequently, policymakers will have additional flexibility to decide whether interest rates need to rise to contain inflation.

In politics, fiscal concerns eased slightly after Andy Burnham, the frontrunner among potential leadership challengers to UK Prime Minister Keir Starmer, ruled out changing the government’s borrowing limits. His comments alleviated investor fears of looser fiscal policy. Meanwhile, Prime Minister Starmer insisted he would not step down even if Burnham wins the upcoming by-election, setting the stage for a potential leadership contest within the government.