Pound Rises on US-Iran Talk Hopes

The pound climbed toward $1.35, rebounding from two-week lows, supported by cautious optimism over US-Iran peace negotiations combined with signs of rising inflation and robust consumer demand. Iranian Foreign Minister Abbas Araghchi is expected in Islamabad tonight, with Pakistani sources indicating a "high likelihood of a breakthrough" in US-Iran talks. Adding to the upward pressure, UK businesses now expect CPI inflation to hit 4% in the year ahead, up from 3.5% in March, according to the Bank of England’s Decision Maker Panel. Meanwhile, UK retail sales rose by 0.7% last month, surpassing expectations, largely driven by motorists stocking up on petrol amid soaring prices linked to the conflict in Iran. The data has intensified expectations for Bank of England rate hikes, with markets fully pricing in two quarter-point increases in 2026 and assigning a probability to a third by year-end.

The British pound fell to around $1.345, its lowest level since April 10, recording a 0.4% weekly decline against the US dollar, amid renewed market pessimism as US-Iran talks stall and the Strait of Hormuz remains effectively closed. Earlier optimism about a potential diplomatic resolution has faded following the end of a two-week ceasefire and the failure to schedule further negotiations. Adding to the pressure, UK businesses now expect CPI inflation to hit 4% in the year ahead, up from 3.5% in March, according to the Bank of England’s Decision Maker Panel. Meanwhile, UK retail sales rose by 0.7% last month, surpassing expectations, largely driven by motorists stocking up on petrol amid soaring prices linked to the conflict in Iran. The data has heightened expectations that the Bank of England may raise interest rates in the near term, with investors now fully pricing in two quarter-point hikes in 2026 and assigning a 50% probability to a third increase by year-end.

The British pound recovered from early losses to stabilize around $1.35 against the US dollar but remained at its weakest level since April 10. Investors balanced escalating US-Iran tensions, with no progress in peace talks and both nations deadlocked over the Strait of Hormuz, against stronger-than-expected UK PMI data. President Trump extended the April 7 truce indefinitely, awaiting a new Iranian proposal, though Tehran has signaled no immediate plans for negotiations. On the economic front, April’s PMI showed UK business activity rebounding after March’s war-induced slowdown, but the uptick partly reflects firms stockpiling supplies amid fears of price spikes and shortages. Politically, Keir Starmer’s ex-chief of staff, Morgan McSweeney, faces a Foreign Affairs Committee hearing next Tuesday over vetting allegations tied to Peter Mandelson, while Labour MP Jonathan Brash called Starmer’s resignation unavoidable due to the scandal’s fallout.