Sterling Consolidates Near Multi-Year Highs as Iran Tensions Resurface

This week, currency markets have been driven by softer US inflation data, ongoing geopolitical tensions in the Middle East, and expectations surrounding future central bank decisions.

The Pound enjoyed a positive week against the US Dollar. Softer US inflation reduced expectations that the Federal Reserve would need to keep monetary policy as restrictive, taking some momentum away from the Dollar. Sterling also received support from improving confidence in the UK’s economic outlook. Against the Euro, Sterling remains close to its strongest levels in more than a year. Thursday’s UK GDP release provided the main domestic market focus. The UK economy expanded by 0.1% in May, driven by growth in the services sector, following a slight contraction in April. The earlier slowdown reflected weaker activity, as businesses responded to heightened uncertainty stemming from tensions in the Middle East.

The Euro also strengthened against the US Dollar for much of the week for similar reasons. Although the US economy remains resilient, softer inflation prompted investors to reduce their support for the Dollar, allowing the Euro to post modest gains. Meanwhile, with policymakers remaining firmly focused on restoring price stability, markets are not expecting further interest rate cuts before 2027.

Looking ahead, the Pound could struggle to hold on to its recent gains against the Euro if UK economic data weakens or if expectations increase that the Bank of England will cut interest rates sooner than the European Central Bank. At the same time, any further escalation in tensions involving the US and Iran could boost demand for the US Dollar as investors seek safe-haven assets, even if recent inflation data has temporarily weighed on the Greenback. The key events for Sterling are the UK CPI release on 22^nd July and the Bank of England’s policy decision on 30^th July, which will include the latest Monetary Policy Report. The European Central Bank meets on 23^rd July, with markets currently pricing in an 88% probability that rates will remain unchanged at 2.25%.

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Key Events

Friday, 17th July

GBP — EUR CPI (y/y) at 10:00 GMT
USD — Consumer Sentiment at 15:00 GMT 
USD — Preliminary Inflation Expectations at 15:00 
 

Wednesday, 22nd July

GBP — UK CPI

Thursday, 23rd July

ECB policy decision

Thursday, 30th July

BOE policy decision