Sterling inches lower as markets focus on Mideast developments, U.S. payrolls

By Sophie Kiderlin

LONDON, Aug 7 (Reuters) - The British pound edged lower against both the euro and U.S. dollar on Friday, with markets weighing talks, and escalations, in the Middle East and awaiting the closely watched monthly U.S. payrolls report due later in the day. 

Sterling was 0.1% lower against the dollar at $1.3438. Against the euro, the pound was similarly lower at 85.76 pence.

Investors were cautious about diplomatic efforts to end the Iran war and reopen the crucial Strait of Hormuz, especially as tensions flared up again in the Middle East. An attack by Yemen's Houthis on southern Saudi Arabia wounded 11 civilians on Thursday, a military official said, as the kingdom warned that coordinated attacks by the Houthis and Iran-backed Iraqi militias were imminent.

Brent crude futures were last slightly lower on the day at $82.16 per barrel.

Elsewhere, U.S. nonfarm payrolls are forecast to have risen by 80,000 last month after an increase of 57,000 in June, according to a Reuters survey of economists. The data could provide clues about the Federal Reserve's interest rate path ahead as markets are weighing the chance of a potential interest rate hike. 

Domestic catalysts for Sterling are meanwhile few and far between. 

"The next big sterling catalyst that we are looking for is actually that everything else in the world calms down. When that happens, what we tend to see is attention switches back to some of the UK fiscal concerns," Nick Rees, head of macro research at Monex Europe, said. 

"If Middle East tensions can cool once we're through payrolls, then we think attention can turn back to some of these UK fundamentals, which aren't good for the pound," he said. 

Investors next week will also get fresh UK economic data, with a gross domestic product reading for both the second quarter and the month of June due Thursday. The data could provide hints about how the economy has fared throughout the Iran war so far. 

Last week, the Bank of England kept interest rates on hold, noting that it needed more time for a sense of how much the war in the Middle East would push up inflation. Investors were last pricing in around 25 basis points of tightening by year-end, and were not fully pricing in a rate hike until the BoE's February 2027 meeting. 

(Reporting by Sophie Kiderlin, editing by Joyjeet Das)