Sterling Recovers Above $1.35 as Markets Eye Data

The pound steadied above $1.35, bouncing back from two-week lows, as investors await a packed week of economic data and global rate decisions while tracking US-Iran peace talks. The Bank of England is widely expected to hold rates at 3.75% amid the Middle East crisis, with analysts anticipating a near-unanimous or strong majority vote to maintain the status quo. This follows March’s UK inflation report last week, which showed CPI at 3.3% year-over-year, fueled by surging fuel prices, leading markets to price in at least two rate hikes this year, up from one, with a possible third. Adding to the economic pressures, oil prices have surged as the Strait of Hormuz remains blocked and US-Iran negotiations stalled. Political uncertainty is also rising ahead of the May 7 local elections, with Prime Minister Keir Starmer facing criticism over his appointment of Peter Mandelson as US Ambassador.

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.