The UK’s 10-year gilt yield held around 4.85%, easing back from Monday’s near 18-year peak of 5.1%, as escalating Middle East tensions and weaker-than-expected PMI data drove market sentiment. President Trump postponed planned US strikes on Iran, citing "positive talks"—a characterization Tehran rejected, despite reports of indirect negotiations. At the same time, an Israeli official dismissed the prospect of a ceasefire, saying Iran had shown no willingness to compromise, while Israel’s defense minister pledged to "continue striking Iran with full force."
Further weighing on the outlook, flash PMI figures showed UK business activity falling to its lowest level since September 2025, with the conflict both stalling growth and pushing inflation higher. In response, investors are now pricing in multiple Bank of England rate hikes in 2026, abandoning pre-war expectations for two cuts, as policymakers prioritize bringing inflation under control in an economy acutely exposed to energy price shocks.
