Pound Rises on UK Political Shift, Rate Hikes Bets

The pound rose to $1.34, returning to mid-June levels, as investors turned their attention to UK politics. Andy Burnham, set to replace Keir Starmer as prime minister on July 20, and his choice of finance minister are now in the spotlight. Betting markets currently favor Ed Miliband, widely viewed as fiscally expansive, for the role. Investors also weighed escalating Middle East tensions, rising oil prices, and inflation concerns. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, heightening uncertainty over energy flows. Markets responded by pricing in further Bank of England rate hikes, nearly fully expecting two increases in 2026, with a September hike now fully priced in. In the US, softer June inflation data eased Fed rate hike pressure, though Governor Christopher Waller warned of possible action if inflation stays above 2%.

The pound traded at $1.335, retreating from recent three-week highs, as investors assessed escalating Middle East tensions, rising oil prices, and concerns about inflation’s impact on monetary policy and economic growth. The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows. Markets responded by pricing in further Bank of England rate hikes, nearly fully expecting two increases in 2026, with a September hike now fully priced in. In the US, Fed Governor Christopher Waller warned that the central bank may need to raise rates "in the near term" if inflation remains above the 2% target. Politically, Andy Burnham is set to become the new Labour leader when the leadership contest ends on Friday and is expected to be officially appointed as prime minister next Monday.

The pound fell back below $1.34, retreating from three-week highs, as investors reacted to rising Middle East tensions. Oil prices surged following another wave of US strikes on Iran, with both sides clashing over the status of the Strait of Hormuz. The US Central Command confirmed strikes on dozens of targets to curb Iran’s ability to threaten shipping in the region, while Iran declared the strait would remain closed "until further notice." The resulting uncertainty amplified inflation concerns, prompting investors to increase bets on further Bank of England interest rate hikes. Markets now anticipate at least one rate increase later this year, with a possibility of a second. Politically, Andy Burnham is set to become the new Labour party leader when the leadership contest ends on Friday and is expected to be officially appointed as prime minister next Monday. Sterling’s resilience amid recent political turmoil suggests much of the negative news has already been factored in.