Pound drifts up as markets nervous after Iran strikes

The pound edged higher on Wednesday as risky assets recouped earlier losses on a perception that Iran's rocket attacks on U.S. forces in Iraq would not lead to a wider regional conflict. Iran said it had fired 15 missiles at U.S. targets in Iraq early on Wednesday in retaliation for last week's U.S. drone strike that killed Iranian commander Qassem Soleimani, stoking fears of a new war in the Middle East.

"It appears the market has concluded that the Iranian retaliation is not as concerning as many feared," JP Morgan strategists said. The British currency edged a third of a percent higher to $1.3163, moving towards a two-week high of $1.3284 hit on Dec. 17. Against the euro, the pound strengthened 0.4% to 84.55 pence.

The pound has had a volatile start to the week with the British currency rising to a high above $1.32 before falling back to nearly $1.31 in late European trading. After winning an 80-seat lower house majority in last month's election, Prime Minister Boris Johnson's Conservative Party finally looks able to pass its Brexit bill, analysts say, paving the way for Britain's exit from the European Union on Jan. 31.

There are three days scheduled for debate in the lower house before a vote on the bill on Thursday. It will then go to the upper house of parliament. With political uncertainty out of the way, investors have increased their pound holdings with net long positions in the currency at their highest levels in more than 1-1/2 years, according to the latest positioning data.

Derivative markets also suggest more upside for the pound with risk reversals -- a ratio of call options to put options -- for one-month maturities at their highest levels in nearly two months.