- U.S. bases attacked by Iran Wednesday

- Sterling up despite geopolitical tensions

- Sanguine Trump response suggests U.S. retaliation likely to be limited

- von der Leyen visit to London key focus for Sterling

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The British Pound is trading higher in midweek trade, with strong gains coming against the Japanese Yen, U.S. Dollar and Euro despite a flareup in geopolitical tensions that would typically be associated with declines for the UK currency.

The gains for Sterling come amidst a sudden ratcheting up of tensions in the Middle East that would typically aid the traditional safe-haven currencies such as the Dollar and Yen. However, a look at the foreign exchange rate boards suggests there has been no traditional risk-off reaction in global FX to the news.

Iran has fired rockets at two air bases in Iraq that gold U.S. troops, and as of yet there is no indication of casualties. Geopolitical anxieties in the foreign exchange markets can have a limited shelf life, an observation reinforced by the market's lacklustre response to news of an Iranian attack.

Iran says the attack is retaliation for the killing of Iran's top military commander Qasem Soleimani which occurred last Friday. The attack sparked a strong risk-off move in global markets that benefited the likes of the Dollar and Yen while putting the Pound under pressure.

However, U.S. President Donald Trump has said "so far, so good", suggesting the President is relatively relaxed.

Crucially, if this is the worst Iran has to offer, fears of 'World War Three' look incredibly overblown. The market appears to be judging that Trump feels there is little need to respond to the Iranians and risk destabilising global markets, thereby ensuring the situation does not spiral into a more serious confrontation.

Regardless of the geopolitics, the Pound is trending higher in the current environment:

Above: Sterling is outperforming most of its peers on Wednesday. * Time to move your money? | Get industry-leading exchange rates and maximise your currency transfer potential with Global Reach. Speaking to a currency specialist will also help you to capitalise on positive market shifts while protecting against risk. Find out more here. * Advertisement

Adam Cole, a foreign exchange strategist with RBC Capital Markets says there is growing sense that this will be the full extent of Iranian retaliation has seen both moves fully reverse and G10 currencies are back to close to where they closed yesterday.

After the attack, President Trump tweeted that "all is well" and that he will be making a statement this morning while Iranian Foreign Minister Zarif said Iran had "concluded proportionate measures in self-defence."

In the wake of the attacks, oil prices jumped as fears of supply disruptions returned, but they were quick to give back a decent portion of those gains in line with the view that both Iran and the U.S. have given themselves an exit.

"The risk for further escalation remains high, something that could keep oil and gold prices supported. Equities could come under renewed pressure if more attacks take flesh, while the franc and the yen could benefit further. For risk appetite to return, the two sides may have to resolve the issue in peace and avoid fuelling fears of a full-blown war. In such case, the safe havens are likely to pull back, and equities may rebound again," says Charalambos Pissouros, Senior Market Analyst at JFD Group.

Sterling: All Eyes on Johnson-von der Leyen Meeting

EU Commission President Ursula von der Leyen will meet with Prime Minister Boris Johnson in Downing Street to assess the overall Brexit situation, with both sides downplaying the prospects of detailed discussions.

The negotiations between the EU and UK to agree a Withdrawal Agreement was at times characterised by frictions and negative briefings, and the Pound tended to underperform at such points.

Von der Leyen will give a speech at the LSE after her meeting with Johnson entitled “Old Friends, New Beginnings: building another future for the EU-UK partnership.” A constructive tone between the two leaders could bolster the Pound into the second part of the week.

"Today’s comments are likely to be constructive and focus on the positives in the UK-EU future relationship," says Cole.

"The PM has changed legislation to avert extending this deadline, subsequently increasing fears of a hard Brexit scenario, which is expected to weigh on the Pound. EU officials believe such a complex trade deal will take a lot longer to negotiate and failure to reach a deal could lead to the UK falling onto World Trade Organisation Rules. Therefore, the talks at this stage are crucial and the tone of the comments made by both sides could play a part in Sterling price action this week," says George Vessey, Currency Strategist at Western Union.

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