Pound edges up as investors focus on Middle East and Bank of England

The pound rose for the first time in a week on Monday, but uncertainty over the longer-term impact on global growth and inflation from war in the Middle East kept it near three-month lows as investors favoured the U.S. dollar as a safe haven.

The Bank of England delivers its decision on monetary policy on Thursday and is widely expected to keep interest rates unchanged at 3.75%.

Markets are close to pricing in one rate hike by the end of the year and investors want to know how closely this aligns with the views of Governor Andrew Bailey and other BoE policymakers.

Prior to the outbreak of the war, the markets had priced in two rate cuts.

STERLING FARES BETTER THAN SOME CURRENCIES

Sterling GBP=D3 was last up 0.2% on the day at $1.3248, narrowly above Friday's trough at $1.3222, the lowest since early December. The pound was steady against the euro EURGBP= at 86.37 pence.

Since the start of the war on Iran, the dollar has been investors' haven of choice, even more than gold, government bonds and other defensive currencies such as the Swiss franc.

Sterling has fared slightly better than the Japanese yen or the euro, which have lost 2% and 3% in value, respectively, in the last three weeks, compared with the pound's 1.7% loss.

This is in part because of the UK's slightly lower reliance on energy imports than that of the euro zone, or Japan, and also Britain's higher borrowing rates.

UK jobs data later this week could help to shape expectations for the longer-term outlook for BoE policy. Employment is softening and wage growth, which has proven particularly resilient, has also started to show signs of abating.

“A weaker job market, combined with persistent inflation, has contributed to sluggish economic growth. With oil prices rising and markets now expecting fewer interest rate cuts globally, the pound could face additional pressure if labor market conditions continue to deteriorate," Laurence Booth, global head of capital markets at CMC Markets, said in a note.

Graphic: World FX rates in 2023 http://tmsnrt.rs/2egbfVh

Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv

Reporting by Amanda Cooper; Editing by Barbara Lewis/Reuters