Sterling steady as investors weigh U.S.-Iran peace prospects

By Sophie Kiderlin

LONDON, June 10 (Reuters) - Sterling was broadly steady against the dollar on Wednesday, with investors closely monitoring the latest flare-up between the U.S. and Iran that has cast fresh doubt over prospects for a deal to end the war.

Iran's Revolutionary Guards said they had carried out missile and drone attacks on U.S. military bases in Jordan, Kuwait and Bahrain on Wednesday in retaliation for American strikes on Iranian targets around the Strait of Hormuz.

The exchange, after U.S. President Donald Trump said that Iran had downed a U.S. Apache helicopter near the strait, marks one of the most significant escalations since Washington and Tehran agreed to a ceasefire in April.

However, currency markets seemed to shrug off the latest attacks and remain focused on hopes of the conflict being resolved, with the safe-haven dollar treading water.

Sterling was last up 0.13% against the dollar at $1.3393, having on Monday hit its lowest since May 18. Against the euro, sterling was little changed at 86.24 pence.

Markets are looking to Friday's UK GDP data, with further fresh impulses for sterling set to come thick and fast next week.

Various economic data points are due then, including inflation and retail sales figures, an interest rate decision from the Bank of England, and the crucial Makerfield by-election will take place on June 18.

The by-election could pave the way back to Westminster for Greater Manchester Mayor Andy Burnham, the candidate of the governing Labour Party. If he wins, he could ignite a party leadership battle that might see him replace Prime Minister Keir Starmer and revive concerns over UK fiscal policy.

"I think right now we're in a holding pattern because we haven't had an awful lot of political news from the UK in the last couple of weeks because obviously everybody's waiting for the by-election," Jane Foley, head of FX strategy at Rabobank, said. Following that however, various questions about UK leadership and policy will likely emerge, she said.

"I think sterling could be on the back foot because of political uncertainty," she said.

The BoE's interest-rate decision will also come on June 18. Money markets were last pricing in a roughly 90% probability of rates being left unchanged then, but investors will be listening for any hints about the rate outlook. 

"There's the risk that maybe the Bank of England doesn't hike interest rates as much as the market has been anticipating because of the weakness of the labour market," Foley said.

(Reporting by Sophie Kiderlin, editing by Gareth Jones)