The British pound moved lower on Monday as a sharp escalation in US-Iran tensions over the weekend heightened the risk that a two-week-old ceasefire agreement could collapse, prompting investors to seek the safety of the US dollar.
Market participants are also closely monitoring UK assets. Prime Minister Sir Keir Starmer is preparing to address parliament amid calls for his resignation following revelations that former US ambassador Peter Mandelson failed the vetting process.
The pound was recently down 0.1% at $1.3503 as the US dollar strengthened. The euro rose 0.1% against the pound to 87.10 pence.
The dollar gained strength against a backdrop of falling US equities and rising oil prices, after Iran stated it would not participate in a second round of talks.
Regional tensions continued to simmer after the US announced it had seized an Iranian cargo ship attempting to breach its blockade of the Strait of Hormuz.
"The market's renewed concerns over the fragility of the Iran ceasefire are spreading, pushing oil prices higher and keeping investors on alert," said Suzanne Streeter, Chief Investment Strategist at the Wealth Club.
However, the pound remains not far from the two-month high of $1.3599 touched last Friday, reflecting market optimism that the worst phase of the Iran conflict may be over.
Sterling has gained 2% this month, reversing a 1.9% decline in April, as expectations related to the ceasefire prompted investors to sell dollars.
The pound could face further declines if Starmer is forced to step down over the latest scandal involving Mandelson's appointment as ambassador to the US. The controversy stems from Mandelson's close association with convicted sex offender Jeffrey Epstein.
Pressure on Starmer intensified after a report on Thursday revealed that Mandelson had failed his security clearance.
"This will be a tough parliamentary debate for Prime Minister Starmer, and it will continue into tomorrow when senior civil servants involved in the approval process are due to appear at a parliamentary hearing," said Chris Turner, Global Head of Markets at ING.
"The pound is likely to give back most of its recent gains against the dollar this week."
Some investors believe that a potential replacement for Starmer could lead to Labour Party policies shifting further to the left, which might increase government borrowing.
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