Sterling Dips as UK Inflation Cools

The pound traded just under $1.34 as investors assessed the impact of softer-than-expected UK inflation and its implications for the Bank of England’s policy path. Headline inflation fell to 2.8% in April, below the 3.0% forecast and the lowest since March 2025, after the UK energy regulator introduced a price cap on April 1. Both services and core inflation also undershot expectations, though fuel inflation surged to a 2022 high amid the conflict in Iran. This follows Tuesday’s jobs report, which signaled a labor market slowdown: the unemployment rate rose unexpectedly to 5% in Q1 2026, regular wage growth hit its weakest level since late 2020, and job vacancies dropped to their lowest since 2021. The cooler inflation data has led investors to further scale back their bets on BOE rate hikes, with markets now pricing in just two increases by December.

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.