The pound remained broadly unchanged against the dollar and euro on Thursday as investors waited for signs of a possible agreement between Iran and Oman that could lead to the
reopening of the Strait of Hormuz.
Financial markets have been closely monitoring developments in the Middle East, with hopes growing that an agreement could be reached to restore shipping through the strategically vital waterway.
The Strait of Hormuz has emerged as one of the main obstacles in wider efforts to bring the US-Iran conflict to an end, with any prolonged disruption threatening global energy supplies and adding to inflationary pressures.
“There was a clear intention from the latest de-escalation not to create too prolonged disruption in the Strait of Hormuz,” said Francesco Pesole, an FX strategist at ING. “I think that’s what markets are caring about at the moment.”
Sterling was little changed at around $1.3460 against the US dollar, while it traded at 85.73 pence per euro.
Bank of England outlook
The pound has also been sensitive to expectations for Bank of England interest-rate policy.
The central bank left interest rates unchanged last week, saying it needed more time to assess the impact of the Middle East conflict on inflation.
Markets are currently pricing in around 23 basis points of additional tightening by the end of the year, with a first rate increase not fully priced in until February 2027.
ING's Pesole said investors may have gone too far in anticipating higher UK rates, leaving sterling vulnerable if the Bank of England does not deliver the increases currently expected.
“We remain pretty bearish on sterling, primarily because we think the market pricing for the Bank of England is way too hawkish, especially if you compare with the ECB,” he said.
UK construction downturn eases
Separate data offered a modestly more positive picture of Britain's construction sector.
The S&P Global UK Construction Purchasing Managers’ Index rose sharply to 44.7 in July from 38.4 in June. The reading remained below the 50 mark separating growth from contraction, but the pace of decline eased.
Commercial construction and housebuilding both weakened at a slower rate, while business confidence among builders reached its highest level since before the Iran conflict began.
For sterling, however, investors remained focused primarily on developments in the Middle East and the prospect of restoring traffic through the Strait of Hormuz.
Any agreement that reduces the risk of prolonged disruption could ease pressure on global energy prices and inflation, while a breakdown in talks could quickly revive concerns over the outlook for the pound and the wider global economy.
