Pound Near Two-Month High

The pound traded slightly above $1.35, retreating from last week’s two-month high of $1.366, as investors turned their attention to Britain’s municipal elections on Thursday, with polls indicating Prime Minister Keir Starmer’s Labour Party could suffer a notable setback. Meanwhile, oil prices remained near four-year highs amid ongoing Middle East tensions, with the US and Iran locked in a dispute over control of the Strait of Hormuz. Markets are pricing in nearly three quarter-point rate hikes from the Bank of England this year. Yet, uncertainty persists after the BoE kept rates unchanged, citing the broad economic fallout from the Iran conflict. Governor Andrew Bailey called the decision a "difficult judgement call," cautioning that delaying action until inflationary pressures are evident could lead to a late response.

The pound traded just below $1.36, close to a two-month peak of $1.366 reached last week, as investors focused on Britain’s municipal elections on Thursday, with polls suggesting Prime Minister Keir Starmer’s Labour Party may face a significant setback. Meanwhile, oil prices continued to rise following reports that two Iranian missiles struck a US warship after it ignored warnings as it attempted to pass through the Strait of Hormuz. Markets see a roughly 50% chance of a Bank of England rate hike in June and expect two 25bp increases by September. However, uncertainty remains high after the BoE held rates steady while acknowledging a wide range of economic impacts from the Iran war. Governor Andrew Bailey described the decision as a "difficult judgement call," warning that waiting for clear evidence of inflationary pressures could risk a delayed response.

The pound climbed to $1.36 in early May, reaching its highest level since mid-February, as investors digested the Bank of England’s latest policy decision and a fresh surge in oil prices driven by Middle East tensions. The BoE’s Monetary Policy Committee voted 8-1 to maintain Bank Rate at 3.75%, with Chief Economist Huw Pill the sole dissenter, advocating for a 25-basis-point hike. Governor Andrew Bailey characterized the decision as an “active hold,” stressing the need to monitor whether energy price shocks will persist amid a softer economic backdrop. Meanwhile, oil prices continued their upward trend, following US President Donald Trump’s insistence on maintaining a naval blockade of Iranian ports, raising concerns that the Strait of Hormuz may remain closed for the foreseeable future. Investors also turned their attention to Britain’s upcoming municipal elections on Thursday, with polls indicating a potential significant setback for Prime Minister Keir Starmer’s Labour Party.