FX.co ★ Pound Drops 2-1/2-Month Low Amid Middle East Tensions

The British pound weakened toward $1.33, its lowest level since December 9, as investors weighed the economic fallout from the escalating conflict in the Middle East alongside mounting inflation pressures and the prospect of a more hawkish Bank of England. Regional tensions intensified following reports that US President Donald Trump had encouraged Iranian Kurdish forces in Iraq to target Iran, that Azerbaijan had warned of retaliation after Iranian missile strikes, and that Kuwait was intercepting missiles and drones in its airspace. The resulting surge in energy prices is expected to keep inflation elevated across Europe, reducing the likelihood of a Bank of England rate cut. UK money markets now see less than a 20% probability of a cut this month, down from more than 80% before the conflict began, while UK rate futures price in less than an even chance of a single cut by the end of 2026.