Sterling Tries to Recover but Political Risks Linger

The pound slipped to $1.34, as investors processed disappointing UK jobs data and tracked developments in the Middle East conflict. Payrolls dropped by 100,000 in April, the sharpest fall since May 2020 and far exceeding forecasts of a 10,000 decline. The unemployment rate unexpectedly rose to 5% in Q1 2026, while regular wage growth slowed to 3.4%, its weakest pace since late 2020, and vacancies fell to the lowest level since 2021. As a result, traders now expect just two Bank of England rate hikes by December. Elsewhere, Brent crude stayed near a four-year high after US President Donald Trump delayed further strikes on Iran but warned of a possible "full, large-scale assault" if talks fail. In UK politics, leadership frontrunner Andy Burnham ruled out changing borrowing limits, easing fears of looser fiscal policy that had driven last week’s UK bond selloff. Meanwhile, PM Keir Starmer vowed to stay on even if Burnham wins the byelection, hinting at a leadership clash.

The pound climbed back to $1.34 on Monday, rebounding after a turbulent week that saw sterling drop over 2%, its steepest weekly fall since November 2024. This followed reports that the US proposed a temporary waiver on Iran oil sanctions, with Tehran open to a long-term nuclear freeze but not a full dismantlement of its atomic program. Despite the recovery, sterling remains under pressure due to political uncertainty, as investors assess the possibility of Andy Burnham, seen as the least market-friendly candidate for bond investors, entering the leadership race to challenge Prime Minister Keir Starmer. Markets are pricing in nearly three Bank of England rate hikes this year.

The pound is trading around $1.335, following a volatile week that saw sterling plummet over 2%, its sharpest weekly decline since November 2024. The drop was fueled by political uncertainty, as investors weighed the risk of Andy Burnham, viewed as the least market-friendly candidate for bond investors, potentially entering the leadership race to challenge Prime Minister Keir Starmer. Adding to the pressure, inflation fears grew due to stalled negotiations between the US and Iran over reopening the Strait of Hormuz, with President Trump voicing renewed frustration with Tehran. Market expectations now include nearly three Bank of England rate hikes this year. Huw Pill, the BOE’s chief economist, who supported a rate increase at the last meeting, reinforced the case for further tightening last week to counter inflationary pressures from the energy shock linked to the conflict.