Pound Remains Weak as Middle East Tensions Weigh

The British pound traded just under $1.34 amid escalating Middle East tensions and growing expectations of a tighter Bank of England monetary policy. US and Iran exchanged air strikes, with US President Donald Trump threatening further action unless Tehran agrees to a peace deal immediately. Money markets currently price in at least a 25-basis-point rate hike by the Bank of England in September, with a probability of a second increase by the end of the year. Investors are now focused on Friday’s monthly GDP data, alongside manufacturing output and foreign trade balance figures. Forecasts indicate the UK economy likely shrank 0.1% in April due to the Iran conflict's delayed impact on businesses and consumers, with Labour Party leadership uncertainty adding to the downturn.

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.