A perfect storm is gathering for the British Pound against the US Dollar, driven by war-induced oil price surges that are re-igniting inflation fears and causing a collapse in UK economic confidence.
Fundamental factors are painting a bleak picture. A survey released on Tuesday revealed that UK households are growing increasingly pessimistic about the economic outlook due to concerns that conflict in the Middle East will trigger another wave of inflation, leading to sluggish growth in consumer spending during February. Data from Barclays indicated that consumer confidence in the strength of the UK, European, and global economies declined in February as the latest Middle East conflict escalated. A separate survey from the British Retail Consortium (BRC) depicted a similarly weak scene, with damp weather last month suppressing sales growth for retailers.
While total consumer card spending remained subdued in February, expenditure on non-essential items hit a six-month high. Spending at major retailers increased by 1.1% year-on-year, a slowdown from the 2.7% growth seen in January and significantly below the 12-month average of 2.3%. Online non-food sales fell by 1.3% compared to the same period last year, though this was an improvement from the 1.9% decline recorded in February 2025. Helen Dickinson, Chief Executive of the BRC, noted that retailers had hoped for a spring sales boost, but the Middle East conflict "risks derailing any recovery process."
In a contrasting development, US existing home sales unexpectedly grew in February, as buyers returned to the market attracted by lower mortgage rates and slowing house price growth. However, persistently tight supply may constrain the upcoming spring selling season. Data from the National Association of Realtors (NAR) showed home sales increased by 1.7% month-on-month to a seasonally adjusted annual rate of 4.09 million units. Lawrence Yun, NAR's chief economist, stated, "Housing affordability is improving, and consumers are responding positively. Inventory is growing, but slowly. If demand increases significantly in the coming months and outpaces supply growth, house prices will inevitably face upward pressure."
Housing affordability continued to improve, with the NAR's Housing Affordability Index rising slightly. However, the potential for further significant drops in mortgage rates may be limited. The war involving the US, Israel, and Iran is pushing up oil and gasoline prices, exacerbating inflationary pressures and lifting US Treasury yields, to which mortgage rates are linked.
Looking ahead, with no major UK economic data releases scheduled for Wednesday, March 11th, market focus is squarely on the US Consumer Price Index (CPI) report for February, due later in the day. This key inflation data, the last before the Fed's March meeting, will significantly influence market pricing for the timing and extent of interest rate cuts.
The conflict's impact on consumer sentiment is clear. Approximately four-fifths of UK respondents expressed worry that the conflict would drive up fuel prices, energy bills, and inflation, with nearly half stating they are taking measures like reducing energy consumption and postponing major purchases. Official David Miles from the UK's Office for Budget Responsibility suggested that if energy prices remain at current levels, UK inflation could rise to around 3% by year-end, above the assumed 2%, though he emphasized the impact is not yet on the scale seen after the Russia-Ukraine war.
In currency markets, the Pound edged higher as hopes for a de-escalation of Middle East tensions pushed oil prices lower, alleviating inflation concerns for the import-dependent UK economy. However, the currency remains down for the month. Analysts note that despite weak UK fundamentals, markets often recover after initial shocks. Investors are closely watching for signs of easing tensions between the US/Israel and Iran, though conflicting signals from Washington and Tehran warrant caution.
Policy expectations are also shifting. Standard Chartered and Morgan Stanley now anticipate the Bank of England will delay rate cuts until the second quarter. Beyond the oil price shock, the Pound has recently been weakened by soft economic data and domestic political turbulence. Strategists warn that as local elections approach in May, markets may be underestimating the risk of rising domestic political uncertainty.
Politically, the UK is coordinating with allies to ensure shipping security in the Strait of Hormuz amid threats from Iran. Prime Minister Keir Starmer's spokesperson confirmed discussions with German and Italian leaders, emphasizing the critical importance of freedom of navigation. Domestically, the Energy Minister has engaged with oil giants BP and Shell on vessel safety, while the Finance Minister has liaised with Lloyd's of London regarding appropriate insurance coverage.
On a positive note, London equities saw their largest gains in nearly a year, rebounding sharply. The rally was primarily fueled by comments from the US President suggesting the Middle East war could end soon, which caused international oil prices to fall significantly. The FTSE 100 and FTSE 250 indices both posted substantial gains. However, the energy sector underperformed.
Geopolitically, the US and Israel launched their most intense airstrikes yet on Iran. Iran's Revolutionary Guard vowed to prevent "a single liter" of Middle Eastern oil from leaving until attacks cease, effectively blockading the Strait of Hormuz and cutting off a fifth of global oil shipments. Despite the escalation, conflicting signals about the war's duration continue to create market volatility. The conflict has expanded, with Lebanon now involved, resulting in significant casualties and displacement.
From a technical perspective, GBP/USD traded within a range on Tuesday, influenced by fluctuating market sentiment regarding the geopolitical risks. The pair's short-term price movement is currently viewed within a 1.3500-1.3400 range. Technical indicators suggest a slightly bullish bias, with the price structure showing a healthy uptrend from recent lows. Key support is identified around the 1.3400 level, with a break above 1.3500 potentially opening the path toward 1.3570. A failure to hold 1.3400, however, could signal a shift to a bearish near-term outlook.
Comments