Pound's Selloff Deepens as U.S. Prepares Strikes on Iran

Trump said the U.S. might have to resort to war against Iran in his address to lawmakers on Tuesday. Official White House Photo by Andrea Hanks.

The British pound is underperforming as the world prepares for U.S. strikes on Iran.

Risk sentiment grips global foreign exchange markets ahead of the weekend with investors covering exposure ahead of potential U.S. strikes on Iran.

The pound's selloff against the majority of its peers deepened into the London close on reports Britain is pulling staff out of Iran and the world's largest shipping companies halt Red Sea travel.

Having built up forces over recent weeks, there's a good chance the U.S. will launch attacks on the Middle Eastern nation over the weekend. All the financial indicators are telling us this to be the case: U.S. stocks are in the red, brent crude is up 1.80% and the Swiss franc - the currency market's favourite safe haven - is gaining against all G10 peers.

CNN's market Fear & Greed Index has flipped from Neutral to Fear over the course of the past 12 hours.

Pound sterling tends to fall against the 'safer' currencies such as JPY, USD, CHF and EUR during such episodes while it tends to rise against the likes of AUD, NZD, NOK and SEK.

Above: The Swiss franc rises against all G10 peers in a clear signal that investors want safety.

However, sterling's weakness is widespread, confirming domestic risks are adding to global headwinds following signs that the political winds have turned decisively against Prime Minister Keir Starmer after his party's heavy defeat in Gorton and Denton overnight.

Tensions between the U.S. and Iran have been simmering for weeks now, but the trigger for markets was when Mike Huckabee, the U.S. ambassador to Israel, warned U.S. workers who wanted to leave "to do so today", an indication of the immediacy of the looming threat.

Above: Sterling falls against all G10 peers.

Nine aircraft refuelling tankers arrived at Israel's Ben Gurion airport today, adding to the massive build-up of U.S. military forces in the region.

"Tensions between Iran and the US have escalated, increasing market focus on the Strait of Hormuz and the upside risk to oil and gas prices, including through potential disruption to Strait transit and damage to Iranian energy facilities," says Bridget Payne, Head of Energy Forecasting at Oxford Economics.

U.S. President Donald Trump said in Tuesday's State of the Union speech that he prefers a diplomatic solution to the crisis with Iran, but that there was also a route to a potential war.

Above: CNN's Fear & Greed Index has slipped into Fear over the past 12 hours.

For their part, Iranian Foreign Minister Abbas Araghchi said Thursday's nuclear negotiations with the U.S. in Geneva led to understandings on some issues and left gaps on others, with another round set for next week.

However, the tell-tale signal is that warning to embassy staff that's doing the rounds; this is traditionally a strong messenger and financial markets are taking note.

For the pound, a period of global geopolitical tensions come amidst an already troublesome domestic backdrop of Bank of England rate cuts - one is expected in March - and rising political uncertainty.

It's a trifecta of negatives ahead of the weekend.