Sterling Slides as BoE Turns More Dovish

The British pound slipped toward $1.32, nearing its lowest point since late November, as investor caution resurfaced after President Donald Trump’s prime-time address provided no clear end in sight for the Middle East conflict. Trump affirmed that the US operation was nearly complete but vowed escalated actions, including possible strikes on electrical plants, over the next two to three weeks. The lack of new justifications for the war further weighed on market sentiment. Ongoing uncertainty and inflationary pressures have prompted a reassessment of Bank of England policy expectations. Investors now anticipate two interest rate hikes in 2026, reversing four days of reduced bets that had left expectations below two hikes by yesterday’s close. Even so, this remains below last week’s peak, when markets briefly priced in as many as four increases. The shift comes despite Bank of England Governor Andrew Bailey’s recent warning that markets were overestimating the likelihood of hikes.

The British pound edged up to $1.33, moving away from recent four-month lows, as optimism grew over a potential near-term resolution to the Iran conflict. The modest recovery follows a volatile March, when sterling fell 1.9% against the USD, its worst monthly drop since July 2025, amid escalating Middle East tensions. US President Donald Trump’s said on Tuesday that the US could exit Iran "in two or three weeks," deal or no deal. Yet, the Strait of Hormuz crisis remains unresolved, with the vital waterway’s closure continuing to disrupt oil flows and drive prices higher. Persistent uncertainty and inflation pressures have led markets to revise Bank of England policy expectations, with investors now pricing in fewer than two rate hikes in 2026, down from four projected in mid-March. Earlier bets on two pre-conflict rate cuts have also been discarded.

The British pound ended March just above $1.32, hovering near its lowest level since early December after a turbulent month dominated by escalating Middle East tensions. Sterling lost around 2% against the dollar as traders weighed the economic fallout from the deepening crisis. Adding to the uncertainty, a Wall Street Journal report revealed that US President Donald Trump was considering ending the military campaign against Iran, even if the Strait of Hormuz remained blocked. The shifting geopolitical landscape triggered a sharp repricing of Bank of England policy expectations: markets now anticipate at least two rate hikes in 2026, with a 50% chance of a move as soon as April, a stark reversal from earlier bets on two cuts. However, BoE policymaker Alan Taylor struck a cautious note last week, setting a "high bar" for rate increases and advocating for steady borrowing costs until the conflict’s economic impact becomes clearer.