The British pound weakened to approximately $1.334 on Monday, hovering just above its May 18 low of $1.3304—its weakest level since early April. The decline came as the US dollar strengthened on growing expectations of a Federal Reserve rate hike later this year and increased safe-haven demand amid escalating tensions in the Middle East.
Dollar Gains Momentum on Geopolitical Concerns
Oil prices surged as much as 5% after Israel reported striking an Iranian petrochemical facility and conducting additional attacks on military targets, despite warnings from US President Donald Trump urging restraint. The escalation reinforced demand for the greenback, which had already been supported by stronger-than-expected US labor market data released last week.
The US Dollar Index (DXY), which measures the dollar against six major currencies, extended its gains for a second consecutive session, trading near 100.10 during Asian hours on Monday. Additional support came from reports that Israeli air defense systems intercepted a missile launched from Yemen toward Israeli territory, heightening concerns over broader regional instability.
For more on how geopolitical risks are affecting other assets, see our coverage on Gold Holds Near $4,485 as Gulf Tensions and Fed Rate Risks Create Crosscurrents.
Sterling Under Pressure from Multiple Fronts
Against the euro, sterling performed slightly better, with the euro down about 0.2% against the pound this month and trading near 0.864 pounds on Monday. However, the currency pair remained within a relatively narrow trading range seen over recent weeks.
The pound is now nearly 2% below levels seen before the conflict involving the United States, Israel, and Iran intensified in late February. While sterling recovered much of those losses during April, concerns about the economic consequences of higher oil prices and potential supply chain disruptions have renewed pressure on the currency.
Interest Rate Expectations Shift Market Dynamics
Another key factor influencing sterling has been changing expectations around interest rates in both the UK and the US. Britain's economy is considered more vulnerable to imported energy inflation than that of the United States. Earlier in the year, traders had anticipated that the Bank of England could raise interest rates multiple times before the Federal Reserve considered moving away from rate cuts.
Market pricing currently suggests UK interest rates could finish the year at around 4.26%, compared with 3.75% at present. In the United States, traders expect rates to end the year near 3.92%, compared with the current range of 3.5% to 3.75%.
BoE Survey Offers Inflation Relief
A Bank of England survey released on Friday indicated that British businesses expect a slower pace of price increases over the coming year compared with expectations recorded in April. The survey suggested that some of the initial inflationary impact from higher energy prices linked to the Iran conflict may be beginning to fade. As a result, market participants increasingly believe the Bank of England may delay any potential rate increase until at least September.
Strong US Jobs Data Reinforces Dollar Support
The dollar also benefited from robust US employment data released on Friday. US nonfarm payrolls increased by 172,000 jobs in May. Although the figure was slightly lower than the revised 179,000 jobs recorded in the previous month, it still pointed to a resilient labor market. The previous month's payroll reading was revised upward from 115,000 jobs. Meanwhile, the unemployment rate remained unchanged at 4.3%, signaling continued stability in employment conditions.
The stronger labor market data strengthened expectations that the Federal Reserve may maintain a tighter monetary policy stance in the months ahead, providing further support to the US dollar while keeping pressure on sterling.
For additional context on how oil price movements are impacting markets, read our article on Oil Jumps 3% on US-Iran Tensions, Aluminum Hits 4-Year High on Supply Fears.
This article is for informational purposes only and does not constitute financial advice.
