Pound Tops $1.35 as BoE Signals Scope for Tightening

The pound climbed back above $1.35 and is on track for a 2.2% monthly gain against the dollar after the Bank of England held its Bank Rate at 3.75% in an 8–1 vote, but several policymakers signaled they could still consider additional rate increases in the future. The BoE described current rates as "reasonable" and reiterated it "stands ready to act as necessary" to steer CPI inflation toward its 2% medium-term target. It also highlighted risks of second-round inflation effects and pledged to closely monitor the Middle East’s impact on global energy supply and prices. This follows the Federal Reserve’s decision to maintain rates, though its meeting revealed growing divisions among policymakers, with four officials dissenting for the first time since October 1992. Three of them opposed the Fed’s guidance suggesting future rate cuts.

The pound edged lower against the dollar to $1.345, its weakest level since April 9, as investors braced for a busy day of economic data and central bank meetings, including the Bank of England. Brent crude rallied to four-year highs following an Axios report that the US is considering further military options in Iran, amplifying inflation concerns ahead of the policy decisions. On monetary policy, the Bank of England is expected to hold rates steady today, reflecting caution amid the Middle East crisis. Yet, markets still anticipate nearly three quarter-point BoE rate hikes in 2026. This follows the Federal Reserve’s decision to maintain rates, though its meeting revealed growing divisions among policymakers, with four officials dissenting, the first time since October 1992. Three of them opposed the Fed’s guidance suggesting future rate cuts.

The pound dipped to $1.35 as investors assessed updated UK economic forecasts and awaited policy decisions from the Fed and the Bank of England, as well as developments in US-Iran talks. Lloyds revised its 2026 UK inflation forecast upward to 3.4% from 2.6%, while slashing its GDP growth estimate to 0.5% from 1.2%. The bank no longer expects any Bank of England rate cuts this year, having previously anticipated two, and now projects unemployment to peak at 5.6% in Q4, up from 5.3%. On monetary policy, both the Fed and the BoE are expected to keep rates unchanged this week, reflecting caution amid the Middle East crisis. However, markets still anticipate almost three quarter-point BoE rate hikes in 2026. Meanwhile, Brent crude surged to a four-year high as the US-Iran standoff continued, with reports that US President Trump directed aides to prepare for a prolonged naval blockade in the Strait of Hormuz to intensify economic pressure on Iran, according to the Wall Street Journal.