Pound Steady Below $1.34 on Middle East Unrest

The British pound held just below $1.34 as Middle East tensions escalated and expectations for a tighter Bank of England monetary policy grew. The US and Iran exchanged fresh strikes, with President Donald Trump stating that Iran is taking "too long" to negotiate a peace deal and will now "pay the price." Iranian Parliament Speaker Mohammad Bagher Ghalibaf also declared on Wednesday that Tehran would respond "decisively and without delay" to any aggression. Rising energy costs from the conflict have amplified inflation concerns, leading investors to anticipate at least a 25-basis-point rate hike by the Bank of England in September, with a high probability of a second increase. However, dovish Monetary Policy Committee member Alan Taylor, who supported the 8-1 vote to hold rates in April, remarked on Monday that current interest rates are "quite restrictive" and saw no need for further tightening to curb inflation.

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.