Sterling slides as Middle East conflict lifts oil prices, muddies rate outlook

By Niket Nishant

LONDON, March 3 (Reuters) - The British pound tumbled to its lowest in three months on Tuesday as the intensifying conflict in the Middle East drove oil prices higher, rekindling inflation fears and prompting traders to trim rate-cut bets.

The currency GBP=D3 slipped 0.65% against the dollar to $1.3319, and was largely unchanged versus the euro at 87.14 pence EURGBP=.

The latest bout of risk aversion piled onto existing pressure on the currency, which has already been weighed down by concerns over the UK's economic outlook and domestic political uncertainty.

At her budget update speech, finance minister Rachel Reeves said Britain's economy is forecast to grow by 1.1% this year, citing the latest projections from the Office for Budget Responsibility.

The new prediction was weaker than a forecast of 1.4% growth for 2026 in the OBR's previous outlook published in November.

"This government has the right economic plan for our country, a plan that is even more important in a world that in the last few days has become yet more uncertain," she said.

RATE CUTS IN QUESTION

"We think that in all scenarios the Bank of England will be more sensitive to the upside risks to inflation than some other central banks," said Capital Economics' chief UK economist Paul Dales.

Traders are pricing in just a 22% chance of a rate cut at the central bank's meeting later this month, compared with 75% on Friday, according to LSEG data. British government bond yields leapt for a second consecutive day.

The complexity in the global backdrop comes at a sensitive time for UK assets. Data released last month showed Britain's economy barely grew in the final quarter of 2025.

Labour's defeat in the Manchester special election has also increased pressure on Prime Minister Keir Starmer, potentially compounding investor unease.

"Much depends on how the conflict evolves and how long it lasts, and what that all means for energy prices," Dales said.

U.S. President Donald Trump said his country's military has enough stockpiled weapons to fight wars "forever."

Brent crude futures LCOc1 were up 6.8%, at $83.05 a barrel after touching their highest since July 2024 at $85.12. U.S. West Texas Intermediate crude CLc1 gained 6.7% at $76.04.