LONDON, March 26 (Reuters) - The pound fell against the dollar for a third day on Thursday, as investors favoured the U.S. currency above most other assets in the face of a rising oil price and no end in sight for the war in the Middle East.
Sterling , which has lost nearly 1% in value against the dollar this month, was last down 0.1% on the day at $1.336. The pound was a touch stronger against the euro , which traded down 0.1% at 86.44 pence, bringing its losses for the month to 1.4%. This is the euro's worst monthly performance against the pound since November 2024, when it fell 1.6%.
For markets, the main focus is the oil price, which has risen by around 45% since the war started in late February. As a result, investors expect central banks, including the Bank of England, to have to shift to raising rates to combat the risk of a damaging spike in inflation.
The BoE, which prior to the conflict had been expected to cut rates twice this year, is now expected to raise rates at least twice before the end of the year, as is the European Central Bank, according to money markets. Traders are attaching a roughly 40% chance of the Federal Reserve raising rates once this year.
This mismatch would ordinarily boost the pound, but given Britain's dependence on energy imports, as well as its more fragile government finances and higher borrowing rates, sterling has come under fire over the last month.
BoE Deputy Governor Sarah Breeden said on Thursday she saw less risk of second-round inflation effects from rising energy prices caused by the Iran war than from Russia's full-scale invasion of Ukraine in 2022, due to a softer labour market.
"Where we are now is very different to 2022 when we had the last energy shock," she told an event hosted by the Resolution Foundation think tank.
A number of strategists have said they feel the BoE has far less room to raise rates this year and, as such, some of those bets on successive rate hikes could be unwound, which would leave sterling vulnerable to a pullback.
"We still see some upside risks for euro/sterling due to the larger room for dovish repricing in a de-escalation scenario for the sterling curve. A move past 87.0 in the coming weeks remains our baseline," ING strategist Francesco Pesole said.
Reporting by Amanda Cooper; Editing by Tomasz Janowski
Source: Reuters