Pound Drops to Two-Week Lows Amid US-Iran Tensions

The British pound erased earlier losses to trade just above $1.32, staying near a two-month low and on track for a weekly decline of more than 1% against the US dollar, amid political uncertainty, shifting global risk appetite, and stronger-than-expected UK retail sales data. Domestic focus intensified after Greater Manchester Mayor Andy Burnham won the Makerfield by-election, strengthening his position as a potential challenger to Prime Minister Keir Starmer. Meanwhile, planned US-Iran peace talks in Switzerland were abruptly canceled, renewing doubts over the durability of the tentative Middle East ceasefire reached over the weekend. On policy, the Bank of England held rates at 3.75% and maintained a cautious tone, trimming its Q4 2026 peak inflation forecast to 3.25% from 3.6%. The Federal Reserve also kept rates unchanged, though officials signaled lingering tightening risks. Money markets now price in at least a 25bp rate hike from both the BoE and the Fed this year.

The British pound slipped below $1.32, its lowest level since late March, after Greater Manchester Mayor Andy Burnham won the Makerfield by-election with 54.8% of the vote, strengthening his position as a potential challenger to Prime Minister Keir Starmer. Investors also digested the latest decisions from the Bank of England and the US Federal Reserve. As expected, the BoE voted 7–2 to keep interest rates unchanged at 3.75%, while maintaining a cautious outlook due to uncertainty surrounding the economic impact of Middle East-related energy shocks. The BoE reiterated its readiness to respond to inflation pressures, although it lowered its forecast for peak inflation in Q4 2026 to 3.25% from 3.6%. The decision followed the Fed's move to hold rates steady, despite a growing number of policymakers signaling the possibility of further tightening this year.

The British pound fell toward $1.32, reaching its lowest level since April 3, after the Bank of England voted 7-2 to maintain interest rates at 3.75%, in line with expectations. Policymakers adopted a cautious stance, citing uncertainty over the economic impact of the energy shock driven by the Middle East conflict. The BoE reiterated its readiness to act on inflation, with Governor Andrew Bailey emphasizing that pressures from the Iran conflict persist despite the ceasefire and potential deal. The Monetary Policy Committee expects inflation to rise later this year as cost increases spread across the economy, though it reduced its peak inflation forecast to 3.25% for Q4 2026, down from 3.6%. This decision follows the US Federal Reserve’s move to hold rates steady, though nine of its 19 policymakers now expect at least one hike this year. Meanwhile, investors await the Makerfield by-election results, which could shape Labour’s leadership and economic direction.