The pound is taking a battering this morning following the news that British forces have launched airstrikes against Iranian military installations. Satellite images confirm at least 50 targets have been destroyed in a coordinated operation that markets had not priced in. The risk premium on UK assets is soaring.
Investors are fleeing to safe havens: gold is up 2%, the yen strengthening, and gilt yields are tumbling as the fiscal implications of a military campaign sink in. The government is yet to issue a formal statement, but the Chancellor will be sweating over the cost of this intervention. Bond markets are already demanding higher yields for UK debt, and the Bank of England will have to weigh the inflationary impact of defence spending against the need for stability.
This is a classic case of geopolitical risk eating into market confidence. If history is any guide, the initial rally in oil prices will be followed by a sharp correction if the conflict doesn't escalate further. But for now, the bottom line is clear: investors hate uncertainty, and they are selling first and asking questions later.
