Pound drops against dollar, euro

The currency dropped 0.4% against the dollar to the $1.34 mark

The pound dropped against the dollar and euro on Tuesday as tensions remain high in the Middle East and predictions of a UK interest rate hike intensify.

The latest PMI reports have also been offering a crucial read on the state of European economies.

The currency dropped 0.4% against the dollar to the $1.34 mark. The dollar index gained 0.2%.

Traders are in a holding pattern as state of the relationship between the US and Iran remains unclear.

On Monday, U.S. president delayed attacks on Iranian power plants, having given Iran 48 hours to restore trade through the Strait of Hormuz, saying Washington had productive “conversations” with Iran.

But Iran denied that it has been in touch with U.S. negotiators, accusing U.S. of price manipulation.

Reports of the negotiations have sent oil prices on a wild ride, stoking worries about potentially high inflation on energy bills.

On Monday, swap traders ramped up their bets on interest rate rises by the Bank of England this year. Forecasts predict four quarter-point increases by the end of 2026 rather than a bank rate hold at its current level of 3.75%.

Meanwhile, the latest S&P PMI reports for the UK have indicated private sector growth slowed considerably in March. The latest release showed demand has weakened, cost pressures have picked up, and the pace of job cuts has accelerated.

The acceleration in cost growth in the manufacturing sector was especially severe, being the sharpest since the depreciation of sterling following Black Wednesday in 1992.

This presents a conundrum for the Bank of England. The conflict is pushing up prices while also weighing on demand, said Jake Finney, senior economist at PwC.

He added: The key judgement for Monetary Policy Committee members will be how long the conflict is likely to last and whether higher energy prices will trigger a broader resurgence in inflation pressures.