Pound Hits Three-Week Low Amid Middle East Conflict and Gilt Selloff

The British pound hit a three-week low against the dollar on Wednesday as investors kept a close eye on the escalating conflict in the Middle East and sold off UK government bonds. The US and Iran engaged in their most significant exchange of fire in weeks, sending shockwaves through global markets.

UK government bond yields reached fresh 18-year highs, increasing the challenge for finance minister John Healey ahead of his first budget on October 28. The pound was down 0.05% to $1.3510, reaching a low of $1.3490, its lowest level since August 14.

Matthew Ryan, head of market strategy at Ebury, noted that one-month implied volatility in sterling has fallen to more than 12-year lows, but this is likely to prove a floor given the brewing budget jitters. He warned that the rise in yields could lead to tax hikes in the autumn, even before accounting for any additional spending increases.