Pound Slips Below $1.35 Despite Broader Dollar Weakness

The British pound edged lower to trade below $1.35, underperforming even as the US dollar weakened broadly. Investor sentiment improved after oil prices fell on hopes of a US-Iran agreement to reopen the Strait of Hormuz, easing concerns over inflation and the prospect of higher interest rates. Crude prices also came under pressure after President Donald Trump said negotiations with Tehran would resume on Monday, reducing fears of further escalation in the conflict. Meanwhile, last week's Bank of England policy meeting reinforced expectations that policymakers are in no rush to tighten monetary policy, prompting markets to scale back bets on interest rate hikes in 2026.

The pound ended July just above $1.34, gaining more than 1% against the US dollar as investors reassessed the Bank of England's latest policy decision and welcomed easing political uncertainty following the appointment of the UK's seventh prime minister in a decade. The new government also pledged to maintain fiscal discipline, supporting investor confidence. The BoE voted 6-3 to leave interest rates unchanged, with three policymakers backing a rate hike versus expectations for a 7-2 split. However, Governor Andrew Bailey downplayed expectations of an imminent tightening cycle, saying the disinflation process remains on track, while some officials suggested rate cuts could return to the agenda if the Iran conflict subsides. Markets now price in just one BoE rate hike by year-end. In the US, the Federal Reserve kept interest rates unchanged this week, with investors expecting two rate hikes by June next year as renewed US-Iran hostilities continue to cloud the economic outlook.

The pound traded around $1.345, close to its strongest level in nearly two weeks, and was heading for a monthly gain of more than 1% against the dollar, its best monthly performance since April. Sterling was supported by investors reassessing the Bank of England’s July decision and by fading political uncertainty in the UK, as the country welcomed its seventh prime minister in a decade, with the new government pledging to adhere to fiscal rules. The BoE voted 6-3 to keep interest rates unchanged, with three policymakers favoring a rate hike compared with expectations for a 7-2 split. However, Governor Andrew Bailey pushed back against speculation of an imminent tightening cycle, saying the disinflation process remains intact, while some officials noted rate cuts could return to focus if the Iran conflict ends. Markets are now pricing in just one rate hike by the end of the year, while renewed US-Iran hostilities continue to add uncertainty to the economic outlook.