Sterling eases as Iran sanctions risk tempers currency rally

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Sterling eases on sanctions risk

Highlights

Sterling dips nearly 0.1% to $1.3633 by 0956 GMT after peaking at $1.3675, as Iran sanctions risk tempers recent gains.
LSEG data shows traders expect Bank of England benchmark rates to rise at least 25 basis points by December, despite most economists anticipating no change.
UK productivity is showing signs of sustained improvement, while October's government budget is viewed as a key test amid high sovereign debt and rising borrowing costs.

Currency move and policy expectations

As reported by Reuters, sterling dips nearly 0.1% to $1.3633 by 0956 GMT, after reaching $1.3675 on Friday, its highest level in more than six months. The pound is flat against the euro at 85.57 pence.

The currency remains one of the best performers among Group of Seven peers this year, supported by expectations that the Bank of England could raise interest rates toward the end of the year as the economy shows greater resilience than expected. LSEG data shows traders see benchmark rates rising by at least 25 basis points by December, although most economists still expect no change.

Maelle Quillevere, economist at UBS Global Wealth Management, says the combination of resilient growth and easing domestic inflation pressures supports the view that there is no need to tighten monetary policy this year. She expects rate cuts could potentially resume in 2027.

Geopolitical and UK confidence factors

The pound's softer tone against the dollar also reflects broader market caution over possible U.S. sanctions on Iran and its trading partners, and concerns that any move could trigger retaliation from Tehran. U.S. Treasury Secretary Scott Bessent is expected to hold a press conference at 1700 GMT.

In the UK, investors are also watching domestic policy signals. Economists at the Resolution Foundation say productivity is beginning to show signs of sustained improvement, following data last week that points to strength among businesses and consumers.

Prime Minister Andy Burnham tells European Council President Antonio Costa that London should pursue closer ties with the European Union more boldly ahead of a UK-EU summit this year. The government's first budget in October is also seen as a key test for investor confidence, as high sovereign debt levels and rising borrowing costs continue to unsettle bond markets in the U.S.

In our earlier article, we looked at how Prime Minister Andy Burnham’s first Budget is shaping up as a major test of fiscal discipline as long-term UK borrowing costs hit new highs. We noted that with bond markets sensitive to any hint of looser budget rules, the autumn statement could have outsized consequences for investor confidence and the broader policy outlook.

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