Pound Slides as Markets React to Middle East Tensions
The British Pound faced renewed pressure on Friday as financial markets responded swiftly to developments in the Middle East following Israeli military action against Iran. In a recorded address, Israeli Prime Minister Benjamin Netanyahu confirmed that the country had targeted key Iranian personnel and infrastructure, including nuclear sites and senior scientists involved in nuclear weapons development. He also urged Israeli citizens to prepare for prolonged periods in shelters.
Among those reported killed were General Hossein Salami, commander of Iran’s Islamic Revolutionary Guard Corps, and General Mohammed Bagheri, Iran’s armed forces chief of staff.
Iran’s Supreme Leader, Ayatollah Ali Khamenei, warned that Israel would face severe consequences for its actions. In retaliation, Iran launched approximately 100 drones towards Israeli territory.
The situation has caused significant unease in global markets. European and US equity futures registered notable declines, while stock indices across Asia dropped by 300 to 400 points. Meanwhile, traditional safe-haven assets such as gold and oil saw a sharp rise in value. The US Dollar also gained ground, underlining its continued appeal during periods of geopolitical uncertainty and surging commodity prices.
Sterling lost half a per cent against the Dollar, falling to 1.3535, and also weakened against other safe-haven currencies like the Swiss Franc and Japanese Yen. In times of increased market turbulence, the Pound tends to underperform against the Euro as well, and Friday saw the Pound to Euro rate fall for a fourth consecutive session, reaching 1.1744. However, Sterling strengthened against a group of risk-sensitive currencies, including the Australian and New Zealand Dollars, as well as the Norwegian Krone, Swedish Krona and various emerging market currencies.
The US President confirmed that Israel had informed Washington of its intentions in advance, although he emphasised that the United States was not directly involved. Speaking to Fox News, he reiterated a firm stance on preventing Iran from acquiring nuclear weapons and hinted at the possibility of renewed diplomatic engagement. He added that American forces are on heightened alert and ready to support Israel should further hostilities emerge.
It is worth noting that previous escalations between Israel and Iran have often de-escalated relatively swiftly, with markets subsequently stabilising. If former President Trump is able to broker a diplomatic breakthrough over the weekend, the sharp movements seen on Friday may unwind just as quickly.
This sets the stage for a weekend where headlines could heavily influence Monday’s market direction.
Euro edges higher as US sentiment drives momentum
The euro extended its upward run this week, with EUR/USD moving decisively above April’s peak of $1.1515 and briefly touching $1.16, marking its strongest level since October 2021. Although the overall trend remains positive, there are early signs that the rally may be losing steam. Throughout May, the euro has slipped beneath several short-term moving averages, suggesting a possible pause in the upward trajectory.
Market sentiment in the United States continues to be the main influence on euro movements. Optimism around trade talks, such as those between the US, the EU, and China earlier in May, has tended to weigh on the euro. In contrast, when confidence in the global economic outlook falters, as it did this week, the euro tends to benefit.
The latest surge was supported by a narrowing interest rate gap in the euro’s favour, after weaker-than-expected inflation data from the US. While rate differentials haven’t been a major driver of EUR/USD in recent months, they had a more noticeable effect this week. Expectations for a more cautious Federal Reserve, alongside a firmer line from the European Central Bank last week, helped reinforce the euro’s appeal.
Later today, fresh data on Eurozone industrial production for April will be released. Analysts expect a slowdown following March’s spike, which was largely driven by manufacturers rushing to adapt to impending tariffs. Preliminary figures from Germany, France, and Spain already point to a loss of momentum, suggesting that growth may be faltering more broadly across the bloc.
Although a weaker reading is unlikely to cause a major reaction in the euro, it will offer a useful snapshot of economic health in the region and help markets judge whether the ECB’s current tone remains appropriate.
Looking ahead
Looking ahead, the Bank of England is widely anticipated to keep interest rates steady at 4.25% next week. However, disappointing UK economic data has led money markets to factor in two further rate reductions before the end of the year. This has limited the pound’s upside and added to investor wariness.
At present, global political tensions remain the primary force guiding markets. With uncertainty over potential developments in the coming days, traders are showing reluctance to hold riskier positions going into the weekend. Should oil prices continue to climb, further pressure on sterling is likely.
