Sterling Strongest Since Mid-February as PM Starmer Holds On

The British pound traded flat just above $1.34, on track for its strongest weekly performance in nearly a month, as a weaker US dollar, spurred by optimism over a potential Middle East peace deal, provided support. US President Donald Trump hinted that a US-Iran agreement could be signed as early as this weekend, though Tehran stated no final decision had been reached. However, domestic economic concerns weighed on sentiment. Data showed the UK economy contracted by 0.1% in April, its first monthly decline since August, raising doubts about whether the Bank of England will proceed with rate hikes this year to tackle inflation. Investors are also focused on the June 18 Makerfield by-election, where Labour’s Andy Burnham, a potential challenger to Prime Minister Keir Starmer, could signal a shift toward more expansionary fiscal policies. Starmer currently faces internal party dissent and record voter dissatisfaction over his economic leadership.

The British pound traded just under $1.34 amid escalating Middle East tensions and growing expectations of a tighter Bank of England monetary policy. US and Iran exchanged air strikes, with US President Donald Trump threatening further action unless Tehran agrees to a peace deal immediately. Money markets currently price in at least a 25-basis-point rate hike by the Bank of England in September, with a probability of a second increase by the end of the year. Investors are now focused on Friday’s monthly GDP data, alongside manufacturing output and foreign trade balance figures. Forecasts indicate the UK economy likely shrank 0.1% in April due to the Iran conflict's delayed impact on businesses and consumers, with Labour Party leadership uncertainty adding to the downturn.

The British pound held just below $1.34 as Middle East tensions escalated and expectations for a tighter Bank of England monetary policy grew. The US and Iran exchanged fresh strikes, with President Donald Trump stating that Iran is taking "too long" to negotiate a peace deal and will now "pay the price." Iranian Parliament Speaker Mohammad Bagher Ghalibaf also declared on Wednesday that Tehran would respond "decisively and without delay" to any aggression. Rising energy costs from the conflict have amplified inflation concerns, leading investors to anticipate at least a 25-basis-point rate hike by the Bank of England in September, with a high probability of a second increase. However, dovish Monetary Policy Committee member Alan Taylor, who supported the 8-1 vote to hold rates in April, remarked on Monday that current interest rates are "quite restrictive" and saw no need for further tightening to curb inflation.