Sterling hits 2-1/2-month low against dollar, edges down versus euro

By Stefano Rebaudo and Ozan Ergenay

March 2 (Reuters) - Sterling hit a 2‑1/2‑month low against the dollar and edged down versus the euro on Monday, as the Iran conflict sent investors into safe‑haven assets while concerns over the Bank of England’s policy path weighed on the British currency.

The dollar rose as the Iran conflict fuelled safe‑haven demand, and higher oil prices.

Sterling fell 0.68% to $1.3393, after reaching $1.3315, its lowest level since December 17.

As well as events in the Middle East, sterling is being affected by domestic politics after a local election in northern England brought a resounding defeat for Prime Minister Keir Starmer's Labour party, raising speculation that the government could move further to the left and increase government spending.

Barclays strategists argued that the growing influence of Labour’s soft‑left faction could justify expectations for more fiscal spending and a higher premium in the pound.

At about 0.88 in the euro/pound cross that premium has grown to around 2%, Barclays estimated. It could widen further in the near-term depending on political developments.

The euro was up 0.05% at 87.68 pence EURGBP=D3.

“For now, sterling and gilts are signalling caution rather than stress, but with political uncertainty rising and the policy trajectory appearing less predictable, the pound’s capacity to rebound looks limited until Labour provides clearer direction," said George Vessey, lead forex and macro strategist at Convera.

Strategists argued that short‑dated gilt yields close to multi‑year lows are consistent with the broader data trajectory and a dovish shift at the Bank of England, reinforcing expectations of sterling underperformance.

The yield on British 2-year government bonds was on Monday up 4 bps at 3.55%, after reaching last week 3.516% its lowest since August 2024.

German 2-year yields rose as inflation concerns mounted.