Sterling Stalls Amid Iran Deadline and Energy Surge

The British pound showed little movement against the dollar, hovering just above $1.32, as markets adopted a cautious "wait-and-see" stance ahead of Trump’s Iran deadline. US President Trump escalated warnings, demanding Iran reopen the Strait of Hormuz by today, or face "devastating" US strikes, including attacks on bridges and power plants, despite potential Geneva Convention violations. Meanwhile, Iran’s continued blockade of LNG tankers has worsened global fuel shortages, pushing energy prices higher and reinforcing expectations of tighter monetary policy. Markets now firmly price in two Bank of England rate hikes this year.

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.