The pound advanced toward $1.35, rebounding from two-week lows, supported by cautious optimism over US–Iran peace negotiations and evidence of rising inflation and resilient consumer demand. Iranian Deputy Foreign Minister Abbas Araghchi is due to arrive in Islamabad tonight, with Pakistani officials citing a “high likelihood of a breakthrough” in talks between Washington and Tehran.
Adding to the upward pressure on sterling, UK firms now expect CPI inflation to reach 4% over the next year, up from 3.5% in March, according to the Bank of England’s Decision Maker Panel. At the same time, UK retail sales rose 0.7% last month, beating forecasts, as motorists rushed to stock up on petrol amid surging prices linked to the conflict in Iran.
The data has strengthened expectations of monetary tightening from the Bank of England. Markets are now fully pricing in two quarter-point rate increases in 2026 and assign a growing probability to a third hike by the end of the year.
