Sterling inched higher against the US dollar on Monday as investors tracked geopolitical developments and awaited the upcoming Bank of England policy meeting later this week.
The pound gained 0.08% to trade at $1.3544 against the dollar.
However, it weakened slightly against the euro, falling 0.1% to 86.70 pence.
Market sentiment remained influenced by uncertainty surrounding a possible US-Iran deal that could reopen the Strait of Hormuz.
Dollar softens after safe-haven rally
The US dollar had strengthened during the Iran conflict, supported by safe-haven flows.
The greenback benefited from the perception that the United States is less exposed than Europe, including Britain, to rising oil prices due to lower reliance on imports.
On Monday, however, the dollar edged lower, while hopes for a diplomatic resolution between the US and Iran remained alive.
This shift provided modest support to sterling.
Political developments add to market uncertainty
Domestic politics in the United Kingdom also remained under scrutiny.
Prime Minister Keir Starmer is facing increasing criticism over his decision to appoint Labour veteran Peter Mandelson as ambassador to the United States.
In addition, upcoming local and regional elections scheduled for May 7 are expected to weigh on the ruling Labour Party.
The party could face significant losses to the populist Reform UK party led by Nigel Farage.
Rate expectations support the pound
Sterling has found support from shifting expectations around monetary policy.
Lee Hardman, senior currency economist at MUFG, said, “The pound has been supported by the hawkish repricing of BoE rate hike expectations encouraged by further evidence of stronger UK growth momentum at the start of this year while underlying inflation pressures remained uncomfortably high at the start of the energy price shock,” as reported by Reuters.
Investors are now focused on the BoE’s policy decision later this week.
While the central bank is widely expected to keep interest rates unchanged, attention will centre on the voting split and forward guidance.
Analysts noted that expectations for roughly two rate hikes by September would likely depend on whether policymakers show dissent in favour of holding rates steady.
Inflation data reinforces policy outlook
Recent economic data has added to the case for tighter policy.
British inflation rose to 3.3% in March from 3.0% in February, partly reflecting the initial impact of the US-Israeli war on Iran.
“The pound has thus far been able to weather the fallout from the latest twist of the Mandelson affair, helped by resilient demand-side data releases and a somewhat smaller exposure to the energy shock relative to the euro zone,” Barclays said in a research note, cited in a Reuters report.
Overall, sterling’s near-term trajectory remains tied to geopolitical developments, domestic political risks, and the Bank of England’s policy signals.
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