Sterling hovered around $1.335, near its weakest level since December 9, as investors weighed the impact of the intensifying Middle East conflict, rising inflationary pressures, and the likelihood of a more hawkish Bank of England. The conflict has escalated sharply, with a US submarine reportedly sinking an Iranian warship near Sri Lanka and NATO air defenses intercepting an Iranian ballistic missile bound for Turkey. At the same time, markets assessed how higher energy prices could shape UK monetary policy.
Interest rate futures now imply only a 20% chance of a rate cut this month and are pricing in just one 25 bps reduction in borrowing costs for the entire year. On the fiscal side, the Office for Budget Responsibility has cut its 2026 UK growth forecast to 1.1% from 1.4% projected in November, even before factoring in potential energy shocks. In contrast, growth forecasts for 2027 and 2028 have been raised to 1.6% for each year, supported by expectations of lower government borrowing and subdued inflation.
