The pound traded at $1.335, retreating from recent three-week highs, as investors assessed escalating Middle East tensions, rising oil prices, and concerns about inflation’s impact on monetary policy and economic growth.
The US military continued strikes against Iran after President Donald Trump reinstated a blockade on Iranian shipping and proposed a 20% fee to guard the Strait of Hormuz, increasing uncertainty over energy flows.
Markets responded by pricing in further Bank of England rate hikes, nearly fully expecting two increases in 2026, with a September hike now fully priced in.
In the US, Fed Governor Christopher Waller warned that the central bank may need to raise rates "in the near term" if inflation remains above the 2% target.
Politically, Andy Burnham is set to become the new Labour leader when the leadership contest ends on Friday and is expected to be officially appointed as prime minister next Monday.