Sterling fell to its lowest level in more than a month on Monday as investors sought the safety of the US Dollar following a sharp rise in oil prices and renewed concerns over global energy supplies.
Growing fears about the risks posed by artificial intelligence also weighed on stock markets, further boosting demand for the Dollar.
Sterling slipped to $1.3474 at the time of writing, its weakest level since 7th August, and was last trading 0.4% lower on the day, Reuters reports.
The decline largely reflected a broad-based strengthening of the Dollar, which also gained against the Euro and Yen. Against the Euro, however, Sterling edged higher, with the single currency down 0.1% at 85.61 pence.
A sharp rise in oil prices unsettled investors and sent global bond yields back towards multi-year highs. Brent crude climbed 3% to around $108 a barrel.
Concerns over energy supplies intensified after Houthi attacks targeted Saudi Arabia, the world’s biggest oil exporter. The strikes came after the kingdom shut down its main pipeline designed to bypass the Strait of Hormuz, further heightening fears about potential supply disruptions.
Meanwhile, a planned meeting between Tehran and other Gulf governments was postponed, as diplomatic efforts to resolve the US-Iran conflict appeared to lose momentum.
Furthermore, growing expectations that the Federal Reserve will raise interest rates at its meeting on Wednesday have provided further support for the greenback. The European Central Bank also raised borrowing costs last week.
The Bank of England is widely expected to leave interest rates unchanged on Thursday, although markets are increasingly pricing in a rate increase later this year, followed by further hikes in 2027.
UK government bond yields are trading at multi-decade highs as investors remain concerned about persistent inflation and the country’s elevated public debt levels.
Typically, higher bond yields and expectations of rising interest rates in a country tend to support its currency. However, the impact on foreign exchange markets has been limited this time as bond yields and rate expectations have risen across major economies.
Data released on Friday showed that the UK economy grew 0.4% in July, significantly exceeding economists’ expectations of no growth.
If the stronger pace of growth recorded in July continues in the coming months, it could increase pressure on the Bank of England to consider raising interest rates.
Yet markets have recently increased their bets on higher interest rates, raising the risk that the Bank of England could deliver fewer rate hikes than investors currently expect, potentially putting further downward pressure on the Pound.