Pound Near Four-Month Low on Iran Tensions

The British pound traded near $1.32, close to its lowest level since late November, as uncertainty over the Iran conflict and surging oil prices weighed on markets. At the same time, the dollar remained supported as stronger-than-expected US jobs data last week further dampened expectations of Federal Reserve rate cuts. US President Trump warned Iran of severe repercussions if it fails to reopen the Strait of Hormuz by Tuesday, though US intelligence suggests little chance of compliance. Meanwhile, reports indicate negotiations for a 45-day truce between the US, Iran, and regional mediators, which could help de-escalate tensions. With crude prices near multi-year highs, inflation concerns have led investors to rule out Fed rate cuts this year. In the UK, markets now expect two Bank of England rate hikes in 2026, reversing pre-war forecasts of two cuts. This shift persists despite Governor Andrew Bailey’s caution that markets may be overestimating the likelihood of tightening.

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.