Sterling pulls back as Iran war sees investors flock to safe havens

By Sophie Kiderlin

LONDON, March 6 (Reuters) - The British pound slipped for a second straight session on Friday as the widening Iran conflict dominated market sentiment and pushed investors towards safe-haven assets.

Sterling GBP= was last down 0.15% against the dollar to $1.3335 on the day, and set for a weekly decline of around 1.1%. Against the euro EURGBP=, the pound was broadly steady at around 86.83 pence, with the euro also trading lower against the dollar which has strengthened amid the Middle East crisis.

Hopes for a de-escalation faded this week as attacks persisted and the conflict broadened, raising uncertainty about how long the crisis could last.

Rising oil prices have fuelled inflation worries, particularly for energy-importing countries such as the UK, and have prompted a shift in interest rate expectations.

The Bank of England, due to announce its latest interest rate decision later this month, is now no longer expected to cut policy then. Markets have pared back chances of a March cut to just 15%, down from roughly 75% a week ago, according to LSEG data.

Traders were last pricing in an around 65% chance of a rate cut by the end of the year, after still expecting two cuts from the Bank of England this year at the end of February.

"Given the uncertainty from what's happening in the Middle East, it makes more sense for the Bank of England to kind of just keep rates on hold and assess how the situation in the Middle East plays out before cutting," Hardman said.

Rate-cut expectations being pushed back could support the pound, he added.

"But in terms of the bigger picture, obviously the energy price shock is a bigger negative for the pound, really and I think that would outweigh any support for the pound from the Bank of England holding back on cutting rates this month," he said.

The yield on British government bonds picked up again Friday, with interest-rate expectation sensitive 2-year gilt yields GB2YT=RR last trading roughly 9 basis points higher at 3.894% after hitting their highest level since mid-October earlier in the day.