Pound retreats as investors stay cautious ahead of rate decisions

The pound edged lower against the dollar on Wednesday, as a stalemate over peace talks to end the Iran war, together with caution ahead of a series of major central ‌bank decisions, including the Bank of England, kept investor risk appetite in check. Sterling has recovered all the losses incurred by the Iran war and is sitting on a gain of 2.1% for April, making this its strongest monthly performance since last August. It was last down 0.15% at $1.3499 and was flat ‌against the euro, which was last at 86.65 pence.

The Federal Reserve delivers its decision on interest rates later on Wednesday and is not expected ‌to make any changes to U.S. monetary policy. It is also possibly Chair Jerome Powell's last meeting as head of the central bank before likely successor Kevin Warsh takes over. The BoE, which meets on Thursday, is not expected to deliver any change to interest rates, meaning traders will be looking closely at how policymakers voted to get a sense of ⁠how justified current ​market-based expectations for two rate hikes this ⁠year are. Britain's economy faces a sharp slowdown this year and in 2027 due to the Iran war, and inflation will stay above the Bank of England's target until 2028, ⁠according to forecasts from leading think tank NIESR published on Wednesday.

"The Middle East conflict has laid bare the fact that the UK remains highly exposed to global ​energy shocks," David Aikman, NIESR's director, said. With a net gain of 0.2% since the start of the war, sterling is still one of ⁠the best-performing major currencies, after the Norwegian crown, which has risen 2.5% and the Australian dollar, which is up 0.6%. Some of that is down to the steeper rise in UK ⁠government ​bond yields, compared with those elsewhere.

Two-year gilt yields are nearly a full percentage point above where they were in late February, while two-year yields in Germany and the United States are up 67 basis points and 47 bps, respectively. Lawrence Mutkin, who is head of EMEA rates strategy at ⁠RBC Capital Markets, said this takes some pressure off the BoE's Monetary Policy Committee to rush into rate rises. "The gilt market selloff has already ⁠tightened monetary conditions a lot: more than ⁠its US or EU equivalents. So the MPC definitely doesn't need to raise Bank Rate to dampen the oil shock's inflationary effect. But because monetary policy implementation is about communication, the MPC does need to deliver a message ‌which will put downward ‌pressure on inflation expectations," he said in a note on Tuesday.

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