Sterling retreats from three-month high ahead of UK labor market data

The British pound fell against a basket of global currencies as European trading opened on Tuesday, retreating from a three-month high against the US dollar and heading for its first loss in three days, as correction and profit-taking gathered pace alongside attempts by the US currency to recover from recent lows.

Safe-haven demand for the US dollar is also picking up amid fears of renewed military confrontation between the United States and Iran, particularly following the expiration of a 60-day temporary ceasefire agreement brokered by Pakistan.

Important UK labor market data are due later today and should provide strong clues about the likelihood of the Bank of England raising interest rates in September.

The Price

• Sterling fell around 0.15% against the dollar to $1.3531, from today’s opening level of $1.3548, after reaching a high of $1.3554.

• The pound gained 0.1% against the dollar on Monday, marking its second consecutive daily gain, and touched a three-month high of $1.3571 amid broad weakness in the US currency.

US dollar

The US Dollar Index rose around 0.1% on Tuesday as it attempted to recover from an 11-week low, putting it on track for its first gain in four sessions and reflecting a rebound in the US currency against a basket of global currencies.

Alongside bargain buying from depressed levels, safe-haven demand for the dollar has strengthened amid fears of renewed conflict with Iran, particularly after the collapse of the temporary peace agreement between the United States and Iran.

Global oil prices

Oil prices rose around 0.5% on Tuesday, extending gains for a third consecutive day, as negotiations between the United States and Iran stalled and shipping traffic through the Strait of Hormuz remained halted.

Higher global oil prices are renewing concerns about accelerating inflation, which could push major central banks toward raising interest rates in the near term.

Latest developments in the Iran conflict

• The 60-day deadline under the “Islamabad Understanding” expired without a final agreement between the United States and Iran.

• Washington is refusing to extend the truce and is demanding Tehran’s surrender, while Iran has said it is prepared to adopt a “fully offensive” military posture if diplomatic efforts fail.

• The main disagreements between the United States and Iran remain centered on the Strait of Hormuz, US sanctions and the guarantees demanded by both sides.

• Mediation efforts and behind-the-scenes contacts are continuing, but no new agreement has been reached so far. Reports indicate that the Trump administration has opened secret communication channels with Iran.

• Efforts are underway to establish a mechanism for restoring shipping traffic through the strait, but the US demand that the waterway be fully reopened before any concessions are offered to Iran is complicating negotiations.

• US President Donald Trump threatened military action against Oman if he believes it is obstructing negotiations, adding another layer of complexity to mediation efforts.

UK interest rates

According to global interest rate futures markets, the probability of the Bank of England raising UK interest rates at its September meeting is currently priced at around 60%.

UK labor market

To reassess those odds, investors are awaiting important UK labor market data later today, including July claimant count figures, alongside the unemployment rate and average earnings data for June.

Sterling outlook

We expect that if UK labor market data come in less hawkish than markets anticipate, expectations for a Bank of England rate hike in September will decline, putting further downward pressure on sterling.