Sterling at five-week low against dollar as markets mull Middle East risk

LONDON (Reuters) -The pound fell against the dollar on Monday with the greenback benefiting from safe-haven demand as investors assessed the risk of an Iranian response to U.S. attacks on its nuclear sites.

By 1054 GMT the pound was down 0.5% versus the dollar at $1.33795, its lowest level since May 20.

British Prime Minister Keir Starmer spoke to U.S. President Donald Trump on Sunday, his office said. Starmer also urged Iran to return to the negotiating table.

Market focus is firmly on the price of oil, which earlier spiked as much as 5.7% and was last up 0.5%.

"Ultimately the pound is exposed...Pro-cyclical currencies have a negative sensitivity to oil prices," said Francesco Pesole, FX strategist at ING.

Elsewhere, UK flash PMIs hit screens showing business activity expanded modestly in June, but the data barely moved the needle on the pound.

The S&P Global UK Composite Purchasing Managers' Index rose to 50.7 from 50.3 in May - edging further above the 50.0 growth threshold.

"Overall, the PMIs suggest that the biggest hit to the economy was in April and things are now starting to recover. That said, the subdued level of the PMIs is still pointing to near stagnation," Thomas Pugh, chief economist at RSM UK, wrote in a note.

The Bank of England held interest rates at 4.25% last Thursday as expected but flagged a weaker labour market and the risk of higher energy prices as conflict in the Middle East escalated.

Despite the hold, market watchers took a doveish hint from the 6-3 vote split in favour of keeping rates on hold, with three MPC members in favour of a cut, a factor that is still playing a role according to ING's Pesole.

"Markets are still tending towards the doveish side for the pound curve," he said.

As of Monday, 58% of traders were betting on a 25-bps rate cut at the BoE's next session in August, with 42% betting on no change.

(Reporting by Lucy Raitano; Editing by Mark Heinrich)