Sterling struggles for direction before possible Hormuz deal

By Samuel Indyk

LONDON, Aug 6 (Reuters) - The British pound was steady against both the euro and the dollar on Thursday as investors awaited updates on a possible deal between Iran and Oman that could reopen the Strait of Hormuz. 

Global financial markets are watching events in the Middle East closely, as expectations have risen that a deal that could potentially reopen the strait – one of the biggest sticking points in wider efforts to end the U.S.-Iran war – could be close.  

"There was a clear intention from the latest de-escalation not to create too prolonged disruption in the Strait of Hormuz," said Francesco Pesole, FX strategist at ING. "I think that's what markets are caring about at the moment."

Sterling was little changed against the dollar at $1.3460 on Thursday as markets bided their time before a possible announcement on a deal. 

Against the euro, the pound was flat at 85.73 pence.  

BOE POLICY

The Bank of England kept interest rates on hold last week, flagging that it needed more time for a sense of how much the war in the Middle East would push up inflation. 

Investors were now pricing in about 23 basis points of tightening by the end of the year, with a first hike not fully priced until the February 2027 meeting.

ING's Pesole believes tightening expectations have overshot, suggesting that the pound could fall, particularly against the euro, if the central bank fails to deliver on rate hikes.

"We remain pretty bearish on sterling, primarily because we think the market pricing for the Bank of England is way too hawkish, especially if you compare with the ECB," Pesole said. 

A survey on Thursday showed the downturn in Britain's construction industry eased slightly in July as commercial building and housebuilding weakened less sharply and builders turned the most optimistic since before the Iran war started.

S&P Global's UK Construction Purchasing Managers' Index (PMI) rose to 44.7 last month, from 38.4 in June, although that was still below the 50 threshold that separates growth from contraction.

(Reporting by Samuel Indyk; Editing by Alex Richardson)