Sterling Slumps Below $1.33 as Hormuz Deadline Looms

The British pound recovered to $1.34, reversing earlier declines, after President Trump delayed US strikes on Iran for five days, citing "very good and productive" negotiations with Tehran. The announcement temporarily reduced fears of a Middle East escalation, just ahead of a 48-hour US deadline for Iran to reopen the Strait of Hormuz. Despite the diplomatic reprieve, markets still price in a number of Bank of England rate hikes this year, a stark reversal from pre-conflict expectations of two cuts, as policymakers focus on taming inflation amid the UK’s vulnerability to energy supply shocks. Focus this week also turns to February CPI, retail sales, March PMI, and consumer confidence data, which could further shape the central bank’s response to the deepening crisis.

The British pound weakened further below $1.33 as investors piled into the US dollar, bracing for a potential escalation in the Middle East conflict. With a 48-hour US deadline for Iran to reopen the Strait of Hormuz expiring today, President Trump has threatened strikes on Iranian power plants if Tehran refuses. Iran’s vow to retaliate against Gulf energy and desalination infrastructure pushed Brent crude above $110 per barrel, deepening concerns over the UK’s exposure to imported energy disruptions. Markets now anticipate four BoE rate hikes in 2026, a dramatic shift from pre-war expectations of two cuts, as policymakers prioritize inflation control. Focus this week turns to February CPI, retail sales, March PMI, and consumer confidence data, which could further shape the central bank’s response to the deepening crisis.

The British pound fell back below $1.34 by the end of a turbulent week, as investors sought safety in the US dollar amid escalating concerns over inflation fueled by the Iran conflict’s energy price surge. Brent crude and European gas prices hit multi-year highs, amplifying pressure on the UK economy and reinforcing expectations of three Bank of England rate hikes in 2026. The BoE unanimously held rates at 3.75% on Thursday while cautioning that the Middle East crisis could push global energy and commodity costs even higher. Policymakers now project a near-term CPI inflation rebound, reversing recent progress in cooling domestic price and wage growth. Adding to economic strains, UK public sector borrowing jumped to £14.3 billion in February 2026, up from £12.1 billion a year ago and exceeding consensus estimates of £8.5 billion. The figure represents the second-highest February borrowing since records began, surpassed only by 2021.