Sterling Holds Firm Amid Iran Talks Uncertainty and Volatile Oil Prices
Market Overview and Sterling Performance
By Samuel Indyk
LONDON, June 1 (Reuters) - The British pound was little changed against the dollar on Monday, remaining within its recent narrow range as investors awaited progress on peace talks between the U.S. and Iran.
Geopolitical Tensions and Oil Market Impact
Negotiators from the U.S. and Iran are still working on a deal, but fresh attacks in the Gulf have challenged optimism about the reopening of the Strait of Hormuz, the key oil and gas artery that has been closed to most maritime traffic since the start of the war in February.
Oil Price Volatility
Oil futures jumped on Monday but fell almost 20% last month, the biggest monthly drop since March 2020.
Britain's Energy Exposure
Britain's reliance on energy imports leaves it more exposed than the U.S. to higher fuel costs. While oil prices have fallen in recent weeks, they remain 30% higher than before the war.
Sterling's Recent Performance
On Monday, the pound was broadly flat against the dollar at $1.3460. Against the euro it was up 0.1% at 86.56 pence.
Expert Commentary
"The pound has been quite resilient during the war," said Tommy von Brömsen, FX strategist at Handelsbanken.
"What has supported the pound is the level of interest rates. Britain has a higher interest rate than most other countries."
Bank of England Policy Outlook
Interest Rate Expectations
Prior to the war, the Bank of England had been expected to lower interest rates twice this year but markets quickly moved to price in rate hikes as investors believed that the BoE would need to take action to combat energy-driven inflation.
Market Pricing for Rate Hikes
Markets are now pricing in about 35 basis points of monetary policy tightening this year, implying one quarter-point hike and around a 40% chance of a second.
Governor's Comments
On Friday, BoE Governor Andrew Bailey said that allowing inflation to run above the central bank's 2% target was justified, signalling there was no need to move quickly with interest rate hikes.
(Reporting by Samuel Indyk; Editing by Emelia Sithole-Matarise)
