Sterling weakens amid rising US rate bets and Middle East tensions

The British pound traded close to its lowest level in nearly two months on Monday as a stronger US dollar continued to pressure the currency.

The dollar's gains were supported by growing expectations that US interest rates could rise later this year, alongside increased safe-haven demand stemming from escalating tensions in the Middle East.

Investor sentiment shifted further towards the dollar after oil prices surged following reports of fresh military action involving Israel and Iran.

The move reinforced demand for the US currency, which had already been supported by stronger-than-expected US labour market data released last week.

Dollar gains momentum on geopolitical concerns

Oil prices rose by as much as 5% after Israel said it had struck an Iranian petrochemical facility and conducted additional attacks on military targets.

The developments came despite warnings from US President Donald Trump urging Israeli Prime Minister Benjamin Netanyahu to avoid further strikes.

The escalation in regional tensions increased demand for safe-haven assets, helping the dollar maintain its recent gains.

The greenback was already trading near a two-month high against a basket of major currencies after stronger-than-expected US employment figures released on Friday.

The US Dollar Index (DXY), which measures the dollar against six major currencies, extended its gains for a second straight session and traded near 100.10 during Asian hours on Monday.

Additional support for the dollar came from reports that Israeli air defence systems intercepted a missile launched from Yemen towards Israeli territory, adding to concerns over broader regional instability.

Sterling remains under pressure

Sterling traded at approximately $1.334, remaining just above its May 18 low of $1.3304, its weakest level since April 8.

Against the euro, however, the pound performed somewhat better.

The euro was down around 0.2% against sterling this month and traded near 0.864 pounds on Monday.

Despite the move, the currency pair remained within a relatively narrow trading range seen over recent weeks.

The pound is now almost 2% below levels seen before the conflict involving the United States, Israel, and Iran intensified in late February.

While sterling recovered much of those losses during April, concerns about the economic consequences of higher oil prices and potential supply chain disruptions have since renewed pressure on the currency.

Interest rate expectations shift market dynamics

Another key factor influencing sterling has been changing expectations around interest rates in both the UK and the US.

Britain's economy is considered more vulnerable to imported energy inflation than that of the United States.

Earlier in the year, traders had anticipated that the Bank of England could raise interest rates multiple times before the Federal Reserve considered moving away from rate cuts.

Market pricing currently suggests UK interest rates could finish the year at around 4.26%, compared with 3.75% at present.

In the United States, traders expect rates to end the year near 3.92%, compared with the current range of 3.5% to 3.75%.

BoE survey offers inflation relief

A Bank of England survey released on Friday indicated that British businesses expect a slower pace of price increases over the coming year compared with expectations recorded in April.

The survey suggested that some of the initial inflationary impact from higher energy prices linked to the Iran conflict may be beginning to fade.

As a result, market participants increasingly believe the Bank of England may delay any potential rate increase until at least September.

Strong US jobs data reinforces dollar support

The dollar also benefited from robust US employment data released on Friday.

US nonfarm payrolls increased by 172,000 jobs in May.

Although the figure was slightly lower than the revised 179,000 jobs recorded in the previous month, it still pointed to a resilient labour market.

The previous month's payroll reading was revised upward from 115,000 jobs.

Meanwhile, the unemployment rate remained unchanged at 4.3%, signalling continued stability in employment conditions.

The stronger labour market data strengthened expectations that the Federal Reserve may maintain a tighter monetary policy stance in the months ahead, providing further support to the US dollar while keeping pressure on sterling.