Sterling climbed against the dollar on Tuesday as traders lifted their bets on a Bank of England rate hike later this year. Escalating Middle East tensions kept the safe-haven dollar bid, capping the pound’s gains, while investors braced for US inflation data.
The pound advanced to around 1.3355 in early European trading on Tuesday, strengthening against the dollar as investors raised expectations that the Bank of England could lift interest rates later this year to keep inflation in check. Sentiment toward sterling improved after policymakers signaled that inflation risks remain elevated, prompting traders to rethink the outlook for UK monetary policy.
BoE hike bets lift the pound
Sterling found support as traders ramped up bets that the Bank of England will tighten policy before year-end to contain price pressures. The shift followed renewed Middle East tensions that pushed oil prices higher after a month-long decline to pre-conflict levels, reviving concern that inflation could stay elevated.
BoE Chief Economist Huw Pill signaled that rates are likely to rise this year to keep inflation from becoming entrenched. Futures markets then shifted focus to the September and November meetings as the likeliest windows for a hike. According to Morningstar, the probability of such a move remains below 50%, even as markets increasingly price one in.
Middle East conflict props up the dollar
Renewed geopolitical uncertainty continued to underpin the dollar. On Tuesday, the United States carried out additional attacks on Iran, and Iranian media reported explosions on Kish and Qeshm islands and in Bushehr and Bandar Abbas. Iran’s military said it struck US military sites in Kuwait, Bahrain, and Jordan, along with two oil supertankers in the Strait of Hormuz.
The escalating conflict has lifted demand for safe-haven assets, a headwind that could cap the currency pair. Earlier, US President Donald Trump said the United States would keep the Strait of Hormuz open and charge a 20% fee.
Focus turns to US inflation
Investors now await the US June Consumer Price Index later on Tuesday. Markets expect inflation to have cooled from 4.2% in May to 3.8% in June; a print in line with that forecast could pressure the dollar and ease bets on further US rate hikes. Traders will also weigh a Tuesday speech from BoE Governor Andrew Bailey, who has kept a measured stance on when to adjust rates.
Sources: Invezz, Exchange Rates UK
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