Pound Rebounds as Middle East Tensions Ease

The British pound climbed back toward $1.34, rebounding from three-week lows, after Iran and Israel agreed to de-escalate strikes following a call from US President Donald Trump. The earlier conflict had pushed crude prices higher on Monday amid fears the ceasefire might fail. Rising energy costs from the tensions have heightened inflation concerns, prompting investors to price in at least a 25-basis-point Bank of England rate hike in September, with a high probability of a second increase. However, dovish Monetary Policy Committee member Alan Taylor, who backed the 8-1 decision to hold rates in April, said on Monday that current interest rates are "quite restrictive" and that no further tightening is needed to address inflation.

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.