Pound Under Pressure Amid Middle East Tensions and Rate Hike Expectations

The British pound fell toward $1.35, its weakest level since August 19, as hawkish Fed remarks supported the US dollar, while lower Brent crude prices eased UK inflation concerns and pushed expectations for the next BoE rate hike into 2027 from late 2026. In his first major speech since becoming chair in May, Warsh warned that inflation has not meaningfully slowed and said policymakers need clearer evidence that underlying price pressures are easing; otherwise, the Fed still has “work to do.” Meanwhile, LSEG data showed markets pricing around 24 basis points of BoE tightening by December and 36 basis points by February 2027. UK inflation rose to 2.9% in July, driven by higher household energy bills, and is expected to climb further toward year-end. However, the labor market has remained subdued, which could make the BoE more cautious about tightening policy in the near term.

The British pound fell below $1.36, retreating from six-month highs reached last week, as a recent decline in Brent crude prices eased inflation concerns and led markets to push expectations for the next Bank of England rate hike into 2027 from late 2026. LSEG data showed around 24 bps of tightening priced in by December and 36 bps by February 2027. Less than 4 bps is priced in for the BoE's September meeting, implying roughly a 15% chance of a hike. Most economists expect rates to remain at 3.75% this year, despite markets previously pricing a hike amid concerns over a potential escalation in the US-Iran conflict. UK inflation rose to 2.9% in July, driven by higher household energy bills, and is expected to climb further toward year-end, while the labor market remained subdued. Investors now await Fed Chair Kevin Warsh's Jackson Hole speech on Friday for further clues on the US rate outlook.

The British pound traded around $1.36, near its strongest level since mid-February, as markets continued to price in Bank of England rate hikes this year despite easing oil prices, while remaining concerned over sticky inflation and rising government debt. Brent crude fell for a third straight session after Iran held talks with Oman on reopening the Strait of Hormuz, with Oman’s foreign ministry saying a temporary corridor could be announced soon. Unverified reports also suggested the US and Iran could reach a new ceasefire agreement in the coming days. Markets continue to price at least 25 bps of BoE tightening by year-end, following data showing UK inflation accelerated to 2.9% in July, its highest level since March, with further increases expected toward year-end. Attention will also turn to the government’s first budget under Andy Burnham in October. On Tuesday, Britain unveiled plans to spend £10 billion on lower-cost housing for renters, with a focus on London.