The British pound was little changed on Wednesday as markets grappled with continued uncertainty over the Middle East conflict, even after U.S. President Donald Trump indefinitely extended a ceasefire with Iran.
It was unclear whether Iran or Israel - Washington’s ally in the two-month conflict - agreed with the extension, and the prospect of peace talks was uncertain as the vital Strait of Hormuz shipping route remained blocked.
Meanwhile, British inflation data showed early price pressures linked to the conflict. Consumer price inflation rose to an annual rate of 3.3% in March from 3.0% in February, in line with expectations.
READ MORE: Sterling dips as US-Iran peace talks falter
“In aggregate, inflation was a little bit higher than previously, but nothing aggressive,” said Dominic Bunning, head of G10 FX strategy at Nomura, adding that inflation readings were likely to climb further later in the year.
“I think sterling’s going to look at this like, it could be better, it could be worse,” he said.
The pound was last marginally higher at $1.3516, while the euro was little changed against sterling at 86.88 pence.
Markets have also been closely focused on interest-rate expectations after the Iran war pushed up inflation forecasts.
Money markets were last pricing in one Bank of England rate hike this year, with some chance of a second.
The BoE is, however, widely expected to leave rates unchanged when it meets later this month, with markets assigning only about a 10% chance of a hike.
Policymakers face “an unenviable balancing act,” said Zara Nokes, global market analyst at J.P. Morgan Asset Management.
“There are clear upside risks to inflation, particularly if households – who have become accustomed to persistent price pressures for some time – demand higher wages to restore their eroded purchasing power,” she said, while noting that a weakening labour market and falling vacancies could hit consumption and amplify downside risks to growth.
The BoE will want to assess which of those risks dominates, Nokes added.
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