The British pound edged higher against a basket of major currencies in European trading on Wednesday, attempting to recover from a one-week low against the US dollar as the greenback eased slightly amid continued military exchanges between the United States and Iran.

The latest rise in global oil prices has renewed inflation concerns among Bank of England policymakers and strengthened expectations for a UK interest rate hike this year. Investors are awaiting key UK inflation data for June later today to reassess those expectations.

The Price

• The pound rose 0.1% against the US dollar to $1.3390, up from the opening level of $1.3375. It touched an intraday low of $1.3372.

• Sterling lost 0.4% against the dollar on Tuesday, marking its fourth consecutive daily decline, and fell to a one-week low of $1.3359. The currency came under pressure from continued military tensions between the United States and Iran, as well as comments from the new UK prime minister about allowing British bases to be used in US airstrikes on Iranian territory.

US dollar

The US Dollar Index fell around 0.1% on Wednesday, retreating from a one-week high amid correction and profit-taking, reflecting a slight slowdown in the US currency against a basket of major and minor peers.

Global oil prices

Oil prices rose more than 1% on Wednesday, extending gains for a second consecutive session to reach six-week highs as concerns over supply disruptions in the Middle East intensified amid continued military escalation between the United States and Iran, along with Houthi threats targeting Saudi-linked ships and oil tankers.

Iran conflict update

• The US military announced the completion of its eleventh consecutive night of airstrikes against Iranian military targets.

• The strikes targeted command centers, logistics facilities, drone storage sites, and naval equipment as part of efforts to protect international shipping through the Strait of Hormuz.

• Iran said it would continue its military response, including attacks on US military sites and bases across the region.

• US President Donald Trump warned that a suspected Iranian nuclear site in the Jabal Al-Fas area could soon face a major military strike.

• Tehran responded that any attack on its nuclear facilities would officially mark an expansion of the war across the entire region.

• Mediation efforts led by several regional parties, including Pakistan and Qatar, remain underway in search of a ceasefire, although no formal agreement or new truce has yet been announced.

UK interest rates

According to global interest rate futures markets, traders are currently pricing in around a 30% probability that the Bank of England will raise interest rates at its July meeting.

UK inflation data

Investors are awaiting key UK inflation data for June later today, which could reshape expectations for British interest rates and significantly influence the Bank of England's monetary policy outlook.

The headline Consumer Price Index is due at 06:00 GMT and is expected to rise 2.7% year-on-year in June, easing from 2.8% in May. Core inflation is forecast to slow to 2.5% from 2.6%.

Pound outlook

We expect that if UK inflation data comes in below market expectations, the probability of further Bank of England rate hikes this year will decline, adding renewed downward pressure on the British pound.

The Japanese yen edged lower against a basket of major and minor currencies during Asian trading on Wednesday, extending its losses for a third consecutive session against the US dollar after trading beyond the 163-per-dollar level for the first time since 1986. The move has fueled speculation that Japanese authorities are nearing another intervention to support the currency and curb its excessive weakness.

The rally in global oil prices to six-week highs, driven by concerns over supply disruptions in the Middle East, has also renewed fears of rising inflationary pressures in Japan. That has strengthened expectations that the Bank of Japan will continue tightening monetary policy, with markets increasingly pricing in another interest rate hike at its October meeting.

The Price

• The US dollar rose less than 0.1% against the yen to ¥163.22, after opening at ¥163.15. It touched an intraday low of ¥163.03.

• The yen ended Tuesday down 0.4% against the dollar after falling to a fresh 40-year low of ¥163.24, pressured by the continued military escalation between the United States and Iran.

Japanese authorities

The latest decline in the yen has once again brought the currency into sharp focus after it traded beyond the 163-per-dollar level for the first time since 1986, reinforcing expectations that Japanese authorities may intervene in the foreign exchange market.

Japanese Finance Minister Satsuki Katayama said the government "stands ready to take decisive action in the foreign exchange market if necessary," adding that officials are closely monitoring currency movements, while declining to comment on any specific exchange rate level.

Japan carried out its largest-ever currency market intervention in April and May after the dollar climbed above ¥160 against the yen.

However, the impact of those interventions gradually faded, while Japanese officials have recently toned down their public warnings, preferring the element of surprise to keep markets guessing.

The positive impact of earlier official comments suggesting that Japan's Government Pension Investment Fund could shift part of its overseas investments into domestic assets has also faded, with market attention returning to the possibility of direct yen-buying intervention by Japanese authorities.

Views and analysis

• HSBC analysts, led by Global Head of FX Research Paul Mackel, said in a report released last week that they believe Japan could intervene in the foreign exchange market again in the near future.

• The analysts added that any intervention is unlikely to have a lasting impact unless the Bank of Japan delivers several hawkish interest rate hikes, the Federal Reserve resumes cutting interest rates, or market sentiment toward Japan's fiscal outlook changes.

• They also said their base-case scenario is for the dollar-yen exchange rate to remain within a new, higher trading range of roughly ¥160 to ¥165 per dollar, with the upper end capped by periodic intervention from Japanese authorities while negative real interest rates in Japan continue to provide underlying support for the pair.

Global oil prices

Oil prices rose more than 1% on Wednesday, extending gains for a second consecutive session to reach six-week highs as concerns over supply disruptions in the Middle East intensified amid continued military escalation between the United States and Iran, along with Houthi threats targeting Saudi-linked ships and oil tankers.

Iran conflict update

• The US military announced the completion of its eleventh consecutive night of airstrikes against Iranian military targets.

• The strikes targeted command centers, logistics facilities, drone storage sites, and naval equipment as part of efforts to protect international shipping through the Strait of Hormuz.

• Iran said it would continue its military response, including attacks on US military sites and bases across the region.

• US President Donald Trump warned that a suspected Iranian nuclear site in the Jabal Al-Fas area could soon face a major military strike.

• Tehran responded that any attack on its nuclear facilities would officially mark an expansion of the war across the entire region.

• Mediation efforts led by several regional parties, including Pakistan and Qatar, remain underway in search of a ceasefire, although no formal agreement or new truce has yet been announced.

Japanese interest rates

• With global oil prices continuing to rise, markets have increased the probability of a 25-basis-point Bank of Japan rate hike at this month's meeting to above 35%.

• Markets are now pricing the probability of a quarter-point rate increase at the Bank of Japan's October meeting at more than 95%.

• Investors are awaiting additional Japanese inflation, employment, and wage data that could reshape expectations for the Bank of Japan's policy outlook.

Oil prices rose around 2% on Tuesday, reaching their highest levels in five weeks, as mounting concerns over energy supply disruptions in the Middle East intensified following escalating attacks between the United States and Iran, alongside threats by Yemen's Houthi movement to impose a naval blockade on Saudi Arabia.

Brent crude futures gained 1.8% to settle at $90.85 a barrel, while US West Texas Intermediate (WTI) crude futures climbed 2% to close at $84.91 a barrel.

Brent recorded its highest settlement since June 10, while WTI posted its strongest close since June 11. Brent also remained in technically overbought territory for a seventh consecutive session, its longest such streak since June 2025.

Supply disruption fears lift oil as Middle East tensions escalate

Fresh military developments added to market concerns, with two tankers carrying Saudi crude bound for Asia changing course in the Red Sea on Tuesday following threats from the Iran-backed Houthis.

At the same time, US forces carried out overnight strikes on targets in southern and western Iran, while Tehran targeted US positions in Bahrain, Kuwait, and Jordan. At least one oil tanker also came under attack in the Strait of Hormuz.

A note from SEB Research said: "Optimists may view the latest US strikes as a final attempt to strengthen the negotiating position before reaching a settlement and reopening the Strait of Hormuz."

It added: "The risk is that the deadlock persists for longer, prolonging uncertainty over energy flows, keeping oil prices elevated, and leading to further attacks."

Red Sea threats and Russian supply disruptions add pressure

On Monday, the Houthis announced a naval blockade on Saudi Arabia, broadening the scope of the conflict and increasing risks to global energy supplies and trade beyond the Gulf region.

Shipping data from LSEG showed that the two tankers carrying Saudi crude to China and India reversed course and headed toward the Suez Canal, while sources confirmed that Saudi Arabia's Yanbu port on the Red Sea continues to operate normally.

Tim Waterer, chief market analyst at KCM Trade, said: "The Houthi threat to impose a naval blockade on Saudi Arabia is a significant development because it raises the risk of supply disruptions from one of the world's largest oil exporters."

In a separate development, data from the Joint Organizations Data Initiative (JODI) showed on Tuesday that Saudi crude oil exports fell for a third consecutive month in May, reaching a record low.

Meanwhile, as the war between Russia and Ukraine expanded beyond Ukrainian territory, the Caspian Pipeline Consortium (CPC) suspended crude oil intake from Kazakhstan after loading operations were halted on Monday following attacks on oil tankers at its Black Sea terminal, according to three industry sources.

Russia accused Ukraine of being behind the attacks on CPC tankers, while Kyiv has not commented on the allegations.

Investors are now awaiting weekly US oil inventory data from the American Petroleum Institute (API) later on Tuesday, followed by the Energy Information Administration (EIA) report on Wednesday.

Analysts expect energy companies to have drawn about 500,000 barrels from US crude inventories during the week ended July 17.

If confirmed, it would mark a second consecutive weekly inventory decline, compared with a draw of 3.2 million barrels during the same week last year and an average five-year decline of 1.2 million barrels over the 2021-2025 period.

The Canadian dollar weakened to its lowest level in a week against its US counterpart on Tuesday after renewed US tariff threats against Canadian goods prompted investors to scale back expectations for further interest rate hikes by the Bank of Canada this year.

The Canadian dollar, commonly known as the loonie, fell 0.2% to C$1.4104 per US dollar, or 70.90 US cents, marking its weakest level since last Tuesday.

US tariff concerns weigh on Canadian rate expectations

On Monday, US President Donald Trump announced a 50% tariff on a broad range of Canadian imports, citing what the US administration described as discriminatory treatment of American automobiles, alcoholic beverages, and dairy products in the Canadian market. The new tariffs are scheduled to take effect on August 19.

Kevin Ford, FX and macro strategist at Convera, said the Canadian dollar's weakness appears to be driven more by shifting interest rate expectations than by direct concerns over tariffs.

"The 30-day window before the latest US tariff threat takes effect gives markets reason to view it as another negotiating tool rather than an imminent breakdown in trade relations," he said.

Yield gap with the US widens despite higher oil prices

Swap markets now indicate investors expect just 13 basis points of additional rate hikes from the Bank of Canada by December, down from 16.5 basis points before the tariff announcement and 18 basis points before weaker-than-expected Canadian inflation data released on Monday.

Ford said the Canadian dollar continues to trade primarily as a reflection of broader macroeconomic forces, including interest rate expectations, growth differentials, and policy uncertainty, rather than as a currency-specific story.

Meanwhile, the US dollar strengthened against a basket of major currencies after the latest attacks in the Middle East pushed oil prices higher, reinforcing concerns that inflationary pressures could persist. US crude oil futures rose 2.5% to $85.31 a barrel.

In the bond market, Canadian government bond yields declined across the curve, with the two-year yield falling 2.7 basis points to 2.812%. The spread between Canadian and equivalent US two-year yields widened by 6.9 basis points to 144.5 basis points, the largest gap since May 2025.