By Linda Pasquini

(Reuters) -Sterling was muted against the dollar on Monday ahead of a Bank of England meeting this week, with markets adopting a wait-and-see approach to rising geopolitical uncertainty, as a conflict between Israel and Iran showed no sign of abating.

Sterling was marginally up against the dollar at $1.359, after falling as much as 0.7% to a low of $1.3518 on Friday, when investors scurried into the relative safety of the greenback after Israel launched a flurry of strikes on Iran.

"The pound is trading largely in line with its relative sensitivity to risk, so a little bit more risk sensitive than the euro," noted Nick Rees, head of macro research at Monex Europe.

The euro rose 0.18% against the pound to 85.26 pence.

The dollar was steady on Monday, while world shares nudged up and oil prices held on to most of last week's increase amid rising tensions in the Middle East at the start of a week packed with central bank meetings.

Rallying oil prices pose a risk to the inflation outlook, as central banks around the world grapple with the impact on prices from Trump's trade tariffs and the effect on economic growth.

"We do not want another big stagflationary shock and that's exactly what it looks like this could turn into. Markets should be pricing that in," Rees said, adding currency markets were at least factoring in the risk to a certain extent.

Investors will look for progress in any bilateral meetings with the U.S. on the sidelines of a Group of Seven leaders meeting in Canada this week.

Meanwhile, the BoE is among the central banks that will meet this week to decide on policy rates.

Money markets expect the Bank to keep interest rates at 4.25% on Thursday and roughly price in another two quarter-point rate cuts by December, with the next one most likely in September.

The pound has faced a series of weak UK data on manufacturing activity, employment and economic growth last week. A spending review by finance minister Rachel Reeves last Wednesday did little to improve the outlook for growth, according to analysts, but raised the chances of possible tax hikes later this year.

Regardless, sterling has gained over 8% against the dollar so far in 2025.

(Reporting by Linda Pasquini in Gdansk; Editing by Amanda Cooper and Toby Chopra)