Pound Rises as Easing Middle East Tensions Boost Risk Appetite

The British pound rose above $1.345 as improving risk sentiment supported demand for risk-sensitive currencies amid growing optimism that the US and Iran could reach a deal to end their five-month conflict and reopen the Strait of Hormuz. Crude oil prices have fallen about 10% this week after US President Donald Trump said the two countries were engaged in "very good discussions," raising hopes of a recovery in Middle Eastern energy supplies. Lower energy prices have eased concerns over inflation and weaker economic growth, reinforcing expectations that the Bank of England will take a gradual approach to policy tightening. Last week's Bank of England meeting strengthened that view, with Governor Andrew Bailey downplaying the need for further rate hikes and saying the disinflation process remains on track.

The British pound held above $1.34 as improving risk sentiment supported demand for riskier assets amid signs of easing tensions between the US and Iran. Qatar said mediators were making progress in negotiations, while US Treasury Secretary Scott Bessent said a deal to reopen the Strait of Hormuz could be be reached as early as Tuesday or Wednesday. Meanwhile, last week's Bank of England meeting reinforced expectations that policymakers are in no rush to tighten monetary policy, prompting markets to pare bets on interest rate hikes in 2026. The BoE voted 6-3 to keep rates unchanged, with three members backing a hike versus expectations for a 7-2 split. However, Governor Andrew Bailey played down the prospect of imminent tightening, saying the disinflation process remains on track, while some policymakers suggested rate cuts could return to the agenda if Middle East tensions continue to ease.

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.