Sterling stuck with Iran in focus, political risks linger

By Stefano Rebaudo

June 2 (Reuters) - Sterling hovered in the middle of its recent range against the dollar and was flat versus the euro as investors focused on developments in the Middle East.

A peace deal would support the British currency while suppressing safe-haven demand for the greenback.

The U.S. dollar traded in a tight range on Tuesday as investors watched for progress on a potential deal to reopen the Strait of Hormuz, while awaiting key U.S. economic data later in the day, which could help to shape the Federal Reserve’s policy path. 

The pound rose 0.10% to $1.3468.

Analysts flagged that sterling has held up despite a recent dovish repricing of the Bank of England's rate outlook, as markets bet that reduced monetary tightening will lend support to the economy.

On Friday, Bank of England Governor Andrew Bailey said that allowing inflation to run above the central bank's 2% target is justified given the uncertainty about the impact of the U.S.-Israeli war on Iran.

The British currency was roughly unchanged against the euro at 86.46 pence after two straight daily increases. It hit 86.81 pence on Friday, its lowest point since May 18.

Barclays warned investors not to lose sight of political risks ahead of a June 18 by-election.

“The Makerfield by-election on 18 June remains a key signpost that is likely to re-ignite the discussion around fiscal policy risks were Burnham to return to Westminster and challenge for the Labour Party leadership,” the bank said.

British Prime Minister Keir Starmer faces a possible leadership challenge later this year if his main rival, Greater Manchester Mayor Andy Burnham, wins a seat in Parliament in a June 18 election. 

“As political tensions build further, a re-widening of the pound's premium towards levels last observed in late 2025 around the Autumn statement saga is plausible, which is consistent with 0.88-0.89 in euro/pound,” Barclays added.

(Reporting by Stefano Rebaudo; Editing by Thomas Derpinghaus)