Sterling edged lower on Tuesday, after reaching a three week high, as investors continued to assess rising tensions in the Middle East and the potential impact on inflation and future interest rates.
Overnight, the U.S. continued military strikes against Iran after President Trump reinstated a blockade on Iranian shipping and proposed a 20% fee for vessels using the Strait of Hormuz. These developments have renewed concerns over global energy supplies, helping to push oil prices higher and keeping inflation risks firmly in focus.
As a result, markets are now almost fully pricing in two Bank of England rate hikes in 2026, with a September rate increase now fully priced in.
Attention now turns to the United States, where CPI inflation is released. Monthly inflation is expected to rise by 0.3%, while Core CPI is forecast to remain at 2.9%. Following the Federal Reserve’s recent shift away from rate cuts, today’s inflation data has become even more important. A stronger-than-expected reading could push expectations for future rate cuts even further into the distance and provide additional support for the U.S. Dollar.
Later in the day, several Federal Reserve officials are also due to speak, with investors looking for further clues on the future direction of U.S. monetary policy. Yesterday, Fed Governor Christopher Waller warned that the central bank may need to raise interest rates “in the near term” if inflation remains above its 2% target, reinforcing the view that policymakers remain concerned about underlying price pressures.
From a UK political perspective, Andy Burnham is expected to become the new Labour leader when the leadership contest concludes on Friday, before being formally appointed Prime Minister next Monday. Investors will be watching closely for any indication of his economic priorities, particularly around fiscal policy and the future direction of the UK economy.
GBP/EUR 1.1705 GBP/USD 1.3346 GBP/AED 4.9034
GBP/AUD 1.9241 GBP/CHF 1.0848 GBP/CAD 1.8828
GBP/NZD 2.3048 EUR/USD 1.1390 GBP/ZAR 22.0259