Pound slips as BoE outlook and Iran conflict cloud sentiment

Sterling edged lower against a stronger US dollar on Tuesday, as investors turned their focus to upcoming central bank decisions and ongoing geopolitical uncertainty linked to the Iran war.

The British pound was last down 0.3% against the dollar, trading at $1.3488.

It was little changed against the euro at 86.55 pence.

Market participants remained cautious ahead of key monetary policy signals expected later this week.

Focus shifts to Bank of England policy outlook

Attention is now firmly on the Bank of England, which is widely expected to keep interest rates unchanged at its upcoming meeting on Thursday.

However, investors are closely watching for guidance on how policymakers assess the economic impact of the Iran war and its implications for future monetary policy.

Analysts expect limited support within the central bank for further tightening at this stage.

“In our view, only the most hawkish rate setter on the 9-person Monetary Policy Committee (MPC), will vote to raise interest rates to mitigate this improbable risk on Thursday, 30 April. The remainder will be content to just say that they are ‘willing to act,’” Andrew Wishart, senior UK economist at Berenberg, said in a note, as cited in a Reuters report.

Wishart added that previous rate hikes have already weighed on economic activity, reducing the likelihood of additional tightening.

Iran war drives market volatility

Money markets have remained highly sensitive to developments in the Iran war since the conflict began.

Rising energy prices have fuelled inflation concerns, while fears of slower economic growth have also intensified.

These dynamics initially led traders to increase bets on further rate hikes from the Bank of England.

However, evolving economic signals and central bank caution have since tempered those expectations.

Other major central banks, including the European Central Bank and the Federal Reserve, are also expected to hold rates steady this week, reinforcing a broader global pause in monetary tightening.

Geopolitics and domestic politics weigh on sentiment

Hopes for a resolution to the Middle East conflict have weakened.

US President Donald Trump is dissatisfied with the latest proposal from Iran aimed at ending the two-month war, further clouding the outlook.

At the same time, domestic political developments in the UK remain on investors’ radar.

Prime Minister Keir Starmer is facing criticism over his decision to appoint Peter Mandelson as ambassador to the United States.

Upcoming local elections are expected to add pressure on Starmer’s leadership, with his Labour Party projected to suffer significant losses.

These political uncertainties are adding another layer of caution for markets already grappling with global risks.

Overall, sterling’s movement reflects a combination of monetary policy expectations, geopolitical tensions, and domestic political concerns, keeping traders cautious in the near term.