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A significant market selloff poses fresh headwinds to the Pound.
The British Pound is under fresh pressure on Friday following a swift financial market reaction to news that Israel has struck targets in Iran.
Israel's Prime Minister Benjamin Netanyahu said in a video statement that Israel struck Iranian senior commanders, nuclear facilities and senior scientists advancing nuclear weapons. Netanyahu also called on the public to be prepared to spend an extended period in shelters.
General Hossein Salami, the head of Iran’s Islamic Revolutionary Guard Corps, and Mohammed Bagheri, the chief of staff of Iran’s armed forces, were among those killed.
Ayatollah Ali Khamenei, Iran’s supreme leader, said Israel will receive “harsh punishment” for its attacks. Iran has since launched around 100 drones against Israel in response.
The geopolitical escalation is being treated as a serious one by financial markets, with European and U.S. equity futures pointing to sharp falls. Asian indices were some 300-400 points in the red.
Oil and gold prices surged and the Dollar is on the front foot, showing that it is still a safe haven in times of geopolitical stresses that include rising commodity prices.
The Pound to Dollar exchange rate reverses recent gains by half a per cent to go to 1.3535. The Pound is softer against other traditional safe havens such as the Franc and Yen.
"Full-scale war in the Middle East moves another step closer," says Tatha Ghose, an analyst at Commerzbank. "Until the danger of further escalation has passed, safe assets are likely to remain in demand."
In times of elevated equity market volatility, as we are seeing, the Pound tends to weaken against the Euro, and the Pound to Euro exchange rate extends a decline for a fourth consecutive day, reaching 1.1744.
However, the Pound is up against the high-beta currencies that tend to be the most responsive to equity market moves, including the Australian and New Zealand Dollars, Krone, Krona and the Emerging Market gang.
The U.S. President said he was forewarned of the attacks by Israel, but stated the U.S. was not involved.
He told Fox News:
"Iran cannot have a nuclear bomb and we are hoping to get back to the negotiating table. We will see. There are several people in leadership that will not be coming back," referencing those Iranian leaders who were killed by Israel.
He said the U.S. is looking to see if there is retaliation, CENTCOM is on high alert, The U.S. will defend itself and Israel if Iran retaliates.
"This is a significant escalation which brings us closer to full-scale war in the Middle East. Statements by officials also suggest that the attacks may not be over yet. This is understandable: Iran risks losing credibility if it does not defend itself against such attacks, while Israel may now feel encouraged to continue after crossing the threshold," says Commerzbank's Ghose.
Bear in mind that the previous episode of Iran-Israel attacks ended relatively quickly, with markets quickly fading the moves.
If Trump can push for a diplomatic solution over the weekend, then we would expect Friday's moves to rapidly reverse. This makes for an interesting weekend of headline watching.