Sterling Surges Past $1.35 on Middle East Talk Hopes

The British pound rose above $1.35, reaching its strongest level since before the late-February outbreak of war, as investors positioned for potential Middle East peace negotiations, despite the US maintaining its blockade on Iranian ports. With US and Iranian delegations possibly resuming talks in Islamabad this week after their latest round ended without progress, risk sentiment improved, sending oil prices below $100 per barrel. Yet, inflationary pressures from high energy costs are set to persist while the Strait of Hormuz remains closed, leading markets to expect a more hawkish Bank of England. Traders now price in nearly two interest rate hikes by year-end. On the domestic front, UK like-for-like retail sales increased 3.1% in March, fueled by a 6.2% rise in food sales as consumers stocked up for the Easter holiday.

The British pound traded at $1.341, slipping from last week’s one-month high of $1.348, after US-Iran negotiations collapsed over the weekend. The breakdown followed Iran’s refusal to renounce nuclear ambitions and what Tehran called “excessive” US demands. Escalating tensions, US President Donald Trump threatened to blockade the Strait of Hormuz, a critical oil chokepoint, sending Brent crude soaring to around $102 per barrel. The spike in oil prices has deepened a global energy crisis, raising fears of an inflation shock and prompting markets to brace for a more hawkish Bank of England. Traders have raised their expectations to nearly two interest rate hikes by the end of 2026, an increase from just one anticipated last week.

The British pound edged above $1.34, marking its strongest level since late February and on track for a nearly 1.5% weekly gain against the dollar, supported by optimism over a potential Russia-Ukraine peace deal and a cautious stance ahead of US-Iran ceasefire talks this weekend. Ukraine’s lead negotiator hinted at progress in talks with Russia, raising hopes for a swift end to Europe’s bloodiest conflict since World War II. Meanwhile, US-Iran negotiations are set for Saturday, though tensions remain high as Tehran maintains its Strait of Hormuz blockade, the worst energy disruption in history. President Trump balanced optimism with warnings over Iran’s new shipping fees. On the monetary front, rising oil prices stoked inflation fears, leading markets to price in a more hawkish Bank of England, with traders now expecting at least one BoE rate hike by end-2026.