Sterling rose slightly against the Dollar on Monday as markets kept a close eye on geopolitical developments, including uncertainty over a potential US-Iran agreement that could lead to the reopening of the Strait of Hormuz, while also awaiting the Bank of England’s policy decision later this week.
The Dollar strengthened during the Iran conflict, gaining in March on safe-haven demand, as the US is less vulnerable than Europe, including the UK, to the impact of higher oil prices due to the region’s reliance on oil imports. However, the Dollar slipped on Monday, with hopes for a deal still intact.
Sterling gained 0.08% against the Dollar, trading at $1.3544, while it slipped 0.1% versus the Euro to 86.70 pence.
Political developments also remained in the spotlight, with Prime Minister Keir Starmer facing increasing scrutiny over his decision to appoint Labour veteran Peter Mandelson as the UK’s ambassador to the United States.
The Pound has been supported by a more hawkish repricing of Bank of England rate hike expectations, driven by further evidence of stronger UK economic momentum at the start of the year, while underlying inflationary pressures remained stubbornly elevated following the energy price shock.
In the local and regional elections on 7th May, the Labour Party is expected to face significant losses to the populist Reform UK party.
With the Bank of England widely anticipated to keep interest rates unchanged on Thursday, markets are likely to focus on any divisions in the vote and the overall tone of the central bank’s guidance, Reuters reports.
Analysts said that forecasts of around two interest rate cuts by September would probably only hold if several policymakers vote against keeping rates unchanged.
The Pound has so far managed to withstand the impact of the latest developments in the Mandelson affair, supported by resilient domestic demand data and relatively lower exposure to the energy shock compared with the eurozone.
However, analysts warned that risks remain, particularly from the possibility of a more expansionary fiscal stance following the May elections, adding that they remain cautious on the outlook.
Data released last week showed that UK inflation rose to 3.3% in March, up from 3.0% in February, with part of the increase attributed to the early price effects of the US-Israeli conflict involving Iran.