Pound Falls to May Low on Middle East Unrest

The pound traded near $1.33, its lowest since May 15, as renewed Middle East hostilities stoked fears of a prolonged Iran conflict and pushed oil prices higher, exacerbating inflation concerns and dampening growth prospects. Brent crude surged over 4% after Iran and Israel exchanged missile strikes, despite calls from President Trump for both sides to cease hostilities and pursue peace talks. Market expectations for central bank action shifted, with traders now fully pricing in two Bank of England rate hikes this year. However, dovish MPC member Alan Taylor stated that current interest rates are "quite restrictive" and saw no need for further increases to address inflationary pressures stemming from the Iran conflict. Meanwhile, REC/KPMG data showed permanent staff placements fell the most in 10 months in May, with firms citing low confidence and rising costs, signaling a weakening jobs market ahead of the BOE’s next meeting.

The pound erased earlier gains to fall below $1.34, reaching its weakest level since May 15, as investors turned to the US dollar following stronger-than-expected US jobs data. Nonfarm payrolls surged by 172,000 in May, almost double the forecasted 85,000, leading markets to fully price in a Federal Reserve interest rate hike by year-end. Political developments also weighed on sentiment, as Greater Manchester Mayor Andy Burnham announced his intention to challenge Keir Starmer for the UK prime minister role, the first time he has publicly confirmed such ambitions. Starmer has stated he will not step down. Burnham’s leadership bid depends on winning the June 18 Makerfield by-election, which would secure him a parliamentary seat and eligibility to contest the leadership. On monetary policy, markets expect nearly two Bank of England rate hikes this year, with the first likely in September.

The British pound held above $1.34 amid US-Iran negotiation concerns, including Iran’s uranium program and Lebanon’s ceasefire. US President Donald Trump suggested the US could act unilaterally on Iran’s uranium, while military clashes in Lebanon and Israel persisted despite a pending US-brokered ceasefire. Domestically, Greater Manchester Mayor Andy Burnham publicly declared his intention to challenge Keir Starmer to be Britain’s prime minister, the first time he has confirmed such ambitions. Starmer swiftly responded, stating he has no intention of stepping down. Burnham’s bid hinges on winning the upcoming Makerfield by-election on June 18, which would secure him a parliamentary seat and eligibility to contest the leadership. On monetary policy, markets anticipate nearly two Bank of England interest rate hikes this year, with the first expected in September, as policymakers balance rising inflation against early signs of a cooling labor market.