Pound Climbs Above $1.34 as Rate-Cut Expectations Ease

The British pound held above $1.34, moving further away from the three-month lows touched recently, supported by a modest improvement in overall market sentiment and by investors scaling back expectations for interest-rate cuts by the Bank of England in 2026. Oil prices remained below $90 per barrel after the International Energy Agency proposed a record release of strategic oil reserves aimed at countering the sharp rise in energy prices since the start of the Iran conflict. The move helped ease some inflation concerns that had recently weighed on markets. On the monetary policy front, money markets are now pricing in only minimal easing this year, a notable shift from before the conflict when around two rate cuts had been anticipated. Investors are also looking ahead to upcoming UK economic data, with monthly GDP figures due on Friday.

The British pound climbed to $1.346, moving away from a three-month low of $1.335 recorded on March 3, as investors rotated away from the US dollar and back into other currencies amid hopes that the conflict will have a smaller impact on inflation than previously feared. Sentiment improved across markets as oil prices cooled following efforts by US President Donald Trump to reassure investors. Trump said the conflict could end quickly and announced that the US Navy would escort tankers through the Strait of Hormuz to safeguard shipping routes. Oil prices fell nearly 6%, and European natural gas prices also retreated. Meanwhile, expectations for Bank of England policy have shifted, with traders again leaning toward the prospect of rate cuts. Markets are now pricing in roughly a 50% chance of a rate reduction by September, marking a sharp turnaround from the previous session when little policy movement was expected and a rate hike had briefly been priced in earlier in the day.

Sterling slid to a three-month low of $1.33 on Monday, extending last week’s losses, dragged down by a stronger US dollar and UK political pressures. The greenback remained in demand as Middle East tensions entered its second week with no sign of easing after US President Trump demanded Tehran’s unconditional surrender. This prompted concerns over rising oil and gas prices, stoking inflation fears and driving expectations of a BoE rate hike, with money markets now pricing in a 70% chance of an increase by year-end, compared with bets on rate cuts just last week. Sterling also faced additional pressure after Prime Minister Keir Starmer reaffirmed his decision not to join initial US-Israel strikes on Iran, emphasizing diplomacy instead. Trump recently dismissed reports that the UK planned to deploy the aircraft carrier HMS Prince of Wales to the Middle East, calling Britain a “once great ally,” though Starmer’s office confirmed the two leaders had spoken by phone about the conflict.