Sterling Gains on Iran Deal Optimism

The pound climbed toward $1.35, reaching its highest level since May 13, as investors welcomed progress in US-Iran negotiations and scaled back Bank of England rate hike expectations following a series of weak UK economic releases. Brent crude fell below $100 per barrel after US President Donald Trump stated that a memorandum of understanding between the two nations had been "largely negotiated" and would reopen the Strait of Hormuz. The data showing April retail sales declining 1.3%, softer inflation, an unexpectedly cooling labor market, and May PMI signaling the first private sector contraction in a year all contributed to the shift in rate expectations. Investors now await speeches from BoE policymakers later this week for monetary policy signals, as well as political developments surrounding Prime Minister Keir Starmer after Labour's regional election defeats this month.

The pound traded little changed just above $1.34 by the end of a week overshadowed by poor UK economic releases and persistent uncertainty in US-Iran negotiations. April retail sales slumped 1.3%, nearly double the 0.6% decline forecast, led by a sharp fall in fuel sales amid rising prices, while the UK’s budget deficit ballooned to £24.3 billion in April, topping the £20.9 billion estimate and marking the highest April shortfall since 2020. The data followed earlier reports of softer-than-expected April inflation, an unexpected cooling in the labor market, and May PMI readings signaling a contraction in private sector activity, prompting traders to trim bets on Bank of England rate increases. Meanwhile, US Senator Marco Rubio cited "some good signs" in Iran talks, though Tehran’s uranium stockpile and control over the Strait of Hormuz remain key sticking points.

The pound held at $1.343 as investors assessed S&P Global flash PMI data and Middle East developments. The survey revealed the UK economy contracted in May, ending a 12-month streak of growth, amid rising political uncertainty and the growing impact of the Middle East conflict. Businesses reported falling output, surging inflation, supply shortages, and job cuts. The weak PMI followed earlier data showing April inflation undershot expectations and the jobs market unexpectedly softened, complicating the Bank of England’s task as it is expected to raise interest rates at least twice this year. At the same time, Brent crude prices held near four-year highs amid concerns over a deadlock in Iran nuclear talks. In the UK, Chancellor Rachel Reeves announced a cost-of-living package, including the suspension of tariffs on over 100 supermarket foods and temporary VAT cuts on summer attractions.