The British pound held steady during Wednesdays trading, as traders remained cautious about efforts to end the war between the United States and Israel on one side and Iran on the other, while assessing the potential economic implications of the conflict.

Sterling recorded little change against the US dollar, trading at $1.3402.

This came as Israel and Iran exchanged airstrikes, while the Iranian military rejected US President Donald Trumps claims that Washington is holding direct negotiations with Tehran to end the war.

Meanwhile, oil prices declined, with Brent crude futures falling about 5.4% to $95.82 per barrel.

On the economic data front, official figures showed that UK inflation held steady at 3% in February, unchanged from January, ahead of expectations that it could rise again as the Middle East war impacts prices.

Luke Bartholomew, Deputy Chief Economist at Aberdeen, said the current inflation report only reflects pre-war conditions, noting that expectations have shifted significantly with the rise in energy prices.

Inflation expectations have risen notably since the outbreak of the war, driven by higher oil prices.

In a sign of the conflicts impact on the British economy, a survey released on Tuesday showed that UK business activity grew at the slowest pace in six months in March, while manufacturing input costs recorded the largest monthly increase since 1992.

Bank of England interest rates

As economic expectations shift, interest rate expectations for the Bank of England have also changed.

Markets currently price about a 67% probability that the bank will raise interest rates at its next meeting in April, with expectations for at least two increases by the end of the year, compared to pre-war expectations of two rate cuts in 2026.

However, many economists appear more cautious than markets regarding the likelihood of rate hikes.

Andrew Wishart, Chief Economist at Berenberg, said the banks response will depend on whether rising energy prices lead to a broader inflation wave across goods and services, noting that he does not expect this to happen.

He added that slowing economic growth and slack in the labor market point to limited ability for companies to raise prices, as well as limited capacity for workers to demand wage increases, reducing the likelihood of an inflationary spiral.

At the close of trading, the British pound also held steady against the euro at 86.54 pence.