Pound Falls to 10-Day Low

The British pound weakened to $1.336 on Thursday, its lowest level in ten days, as investors digested fresh fiscal announcements and a more hawkish interest rate outlook. Finance Minister John Healey warned about rising business costs alongside persistent cost-of-living pressures, reinforcing concerns over the UK's inflation outlook. Earlier in the day, Prime Minister Andy Burnham unveiled a 20% reduction in business rates for pubs, clubs, and live music venues from April, the third announcement of measures in three days to support businesses and households. He also reaffirmed his commitment to maintaining fiscal discipline. Meanwhile, oil prices climbed to near two-month highs amid escalating tensions in the Middle East, adding to inflation risks. As a result, money markets are now pricing in nearly two quarter-point interest rate hikes from the Bank of England by the end of the year.

Sterling remained below $1.34, its lowest level in more than a week, after UK inflation slowed more than expected, reducing the prospect of the Bank of England raising interest rates this month. Annual inflation eased to 2.6% in June, the lowest since March 2025 and below forecasts of 2.7%, driven by lower transport and food prices. However, core inflation (2.6%) and services inflation (3.6%) both came in slightly above expectations. Businesses remain cautious, with CBI economist Martin Sartorius warning that inflation could pick up again in the coming months. Meanwhile, new Chancellor John Healey welcomed the softer inflation reading but said more support is needed, as the government announced measures including lower VAT on electricity bills and a £2 cap on single bus fares across England from January. Elsewhere, Middle East tensions escalated after President Donald Trump warned of further strikes on Iran and pledged retaliation if Iran-backed Houthi rebels disrupt Red Sea shipping.

The British pound erased its early gains to trade below $1.34, its lowest level in a week, as investors continued to assess the UK's evolving political landscape. Newly appointed Prime Minister Andy Burnham, who took office on Monday, unexpectedly named former Defence Secretary John Healey as chancellor. Healey was not considered a frontrunner for the role, but his appointment has fueled expectations of higher defence spending. Seeking to reassure markets, Burnham and Healey emphasized their commitment to maintaining fiscal discipline, after the prime minister appeared to step back from plans to raise the personal income tax allowance. On the economic front, data from the ONS showed UK public sector borrowing totaled £16 billion in June, around one-third lower than a year earlier and below market expectations. Investors also kept a close eye on developments in the Middle East and the subsequent rise in oil prices.