Pound Hits Pause as Markets Anticipate US Sanctions and Interest Rate Hikes

The British pound has paused its four-week rally as investors await potential US sanctions on Iran and its trading partners. Sterling dipped nearly 0.1% to $1.3633 by 0956 GMT, after reaching a more than six-month high of $1.3675 on Friday. The pound's weakness against the dollar was also attributed to market expectations that the Bank of England will hike interest rates towards the end of the year in response to better-than-expected economic resilience.

According to LSEG data, traders see benchmark interest rates rising by at least 25 basis points by December. However, most economists anticipate no change. Maelle Quillevere, an economist at UBS Global Wealth Management, expects rate cuts could potentially resume in 2027 due to resilient growth and easing domestic inflation pressures.

The UK-EU summit this year will be crucial for investor confidence in Britain, as concerns over elevated sovereign debt levels and higher borrowing costs have rattled bond markets. Prime Minister Andy Burnham has called for London to pursue closer ties with the European Union.