By Amanda Cooper LONDON, April 15 (Reuters) - The pound on Wednesday took a breather from its longest stretch of gains in a year, dipping against the dollar after a swell of investor optimism over a
Sterling Holds Steady but UK Economic Risks Grow amid War and Energy Strains
Market Reactions and Economic Outlook
By Amanda Cooper
LONDON, April 15 (Reuters) - The pound on Wednesday took a breather from its longest stretch of gains in a year, dipping against the dollar after a swell of investor optimism over a possible resolution to the Iran war pushed the safe-haven greenback to six-week lows.
Short-Lived Sterling Strength and IMF Forecasts
Sterling's strength could prove short-lived, however, given how the war has complicated the outlook for UK growth and inflation, analysts said.
Britain suffered the sharpest cut among large rich countries to economic growth forecasts by the International Monetary Fund due largely to the Iran war. The IMF said on Tuesday that Britain's economy was now on course to grow by only 0.8% in 2026, down from a previous projection of 1.3%, the biggest downgrade made by the Fund for any Group of Seven nation.
Sterling Performance and Bond Market Impact
Sterling was last steady at $1.357, having staged a near-unbroken 3% rally since hitting four-month lows at the end of March. The pound had gained for seven days in a row, the longest such stretch since last April's 10-day run.
Because of the UK's dependence on imports of natural gas in particular, the price of which has shot up 40% since the war started, British government borrowing costs have risen in tandem, making its two-year bonds the worst-performing of any major economy, with a rise of nearly 70 basis points since late February to 4.2%.
Bank of England Rate Expectations
As such, traders rushed to price in the prospect of Bank of England rate rises this year. But, as optimism grows for some kind of resolution to the worst of the disruption to oil flows through the Strait of Hormuz, some of that pricing has moderated, paving the way for sterling losses, analysts said.
"All in all, the latest developments keep us confident with our call that front-end rates have further to fall in the UK than the euro zone and that should offer lasting support to euro/sterling beyond the near-term," ING strategist Francesco Pesole said in a note.
"...The pair is suffering a bit from improved risk sentiment, but rate differentials will return as primary drivers once the dust has settled."
Euro and Pound Dynamics
The euro is still showing a near-1% loss against the pound since the start of the war, and on Wednesday was flat at 86.94 pence.
Bank of England Policymaker Perspectives
Bank of England interest rate-setter Megan Greene, among the policymakers most worried about price pressures prior to the war, said on Tuesday it could take months to see how much long-lasting damage is caused to Britain's economy by the energy price spike and that upside risks to inflation were "paramount" to her thinking.
"We can't wait to have all the definitive data showing that there are second-round effects because then we will be too late already, so it will have to be a judgment call," she said.
(Reporting by Amanda CooperEditing by Peter Graff)
