Pound Holds Steady as Markets Await Middle East Clarity

The British pound steadied around $1.34 as investors remained cautious, awaiting greater clarity on the Middle East peace process. Sterling found support after US President Donald Trump called off planned strikes on Iran, signaling that a diplomatic resolution to the conflict remained possible, although uncertainty persisted after Tehran denied any ongoing or planned negotiations. Meanwhile, last week's Bank of England 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 BoE voted 6-3 to keep interest rates unchanged, with three members favoring a hike versus expectations for a 7-2 split. However, Governor Andrew Bailey downplayed the prospect of an imminent tightening cycle, saying the disinflation process remains on track, while some policymakers suggested rate cuts could return to the agenda if tensions in the Middle East ease.

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.