Good morning,  

All eyes continue to be directed towards developments surrounding the Israel-Iran conflict, and whether the US will become directly involved. 

Following US President Donald Trump’’s demand for Iran’s complete capitulation, there are reports indicating that he has approved a military offensive against Iran. Nevertheless, he has yet to give the final order to proceed. When asked about a possible attack on Iran’s nuclear facilities, Trump commented: ‘I may do it, I may not do it’. He reaffirmed his demand for Iran’s unconditional surrender, stating that the ‘upcoming week will be significant’. Additionally, it is important to note that Iranian Supreme Leader Ayatollah Ali Khamenei has maintained that his nation will not relent, warning that any US intervention could lead to severe and irreversible consequences.

As you can see, the situation remains tense and uncertain. The best-case scenario, of course, would be a diplomatic resolution, including a commitment from Iran to eliminate all nuclear capabilities. 

Fed on hold; two rate cuts still on the table this year

Yesterday, the US Federal Reserve (Fed) unanimously voted to hold the funds target rate unchanged at 4.25% – 4.50%, which was widely expected by markets and economists. 

All in all, the meeting was a snoozer. The wait-and-see attitude was maintained; the rate statement offered little change, emphasising that the economy grew at a ‘solid pace’ with unemployment remaining low, and ‘somewhat elevated’ inflation. Furthermore, Fed Chair Jerome Powell reiterated that the central bank remains in a good place and can wait for further clarity.

As shown in the Fed’s economic projections table (below), growth projections were downgraded. The real GDP (Gross Domestic Product) median projection was lowered to 1.4% from 1.7% for 2025, while inflation projections were raised (PCE inflation was increased to 3.0% from 2.7% for 2025). Unemployment projections were increased across all years (to 4.5%, 4.5% and 4.4% for 2025, 2026 and 2027, respectively). The policy path was unchanged, with the Fed still expecting two rate cuts this year, consistent with market pricing, which suggests September’s meeting could be the date to watch for the first 25-basis point (bp) cut. However, interestingly, 2026 and 2027 were revised to show one less rate cut in each year, totalling 100 bps worth of cuts projected in the future.

BoE eyed

At 11:00 am GMT, the Bank of England (BoE) will also claim some of the limelight today. The BoE is set to keep the bank rate unchanged at 4.25%, and forward guidance – that ‘gradual and careful’ approach – is unlikely to be altered by much. Markets continue to price in two rate cuts this year.

Since the previous BoE meeting, economic data suggests a no-change decision. Recent soft domestic data shows the labour market is weakening – including slowing private sector pay growth and falling payroll employment – which could lead to increased ‘dovish dissent’ among policymakers today. However, inflation remains elevated, and the escalation in the Middle East, along with possible upward pressure on oil prices, makes it a challenging scenario for the BoE regarding the timing of policy easing, which may lighten the central bank’s dovishness today. 

The report anticipates a 7-2 vote in favour of a hold, and this will be a closely watched metric, I believe. This follows the three-way split at the previous meeting, with voting 5-4 in favour of cutting the bank rate by 25 bps. The vote on rates revealed deeper divisions than anticipated. While Swati Dhingra and Alan Taylor advocated for a more substantial 50-bp reduction, Catherine Mann and Huw Pill argued for keeping rates where they were. 

While there are 16 bps of easing priced in for August’s meeting, the BoE will be looking for clear signs of inflation cooling. UK May CPI inflation data (Consumer Price Index) was in line with expectations across all headline measures. Inflation rose by 3.4% year-on-year (YY), down from 3.5% in April, with the core YY measure also having eased by 3.5%, from 3.8%. Importantly, the services level decreased to 4.7% from 5.4% YY, which is in line with the BoE’s forecasts.

Heading into the event, the British pound (GBP) is down versus the majority of its G10 peers. Higher-than-expected dissent among policymakers (such as a 6-3 vote) could trigger further underperformance in the GBP. However, it is essential to note that the language and tone of the BoE’s guidance may influence this.

The EUR/GBP (euro versus the British pound) is currently trading at daily resistance between £0.8567 and £0.8546, an area complemented by monthly trendline resistance, drawn from the high of £0.9504. The caveat here, of course, is the lack of follow-through selling beyond monthly support at £0.8229-£0.8315, which signals buyers could be gaining strength. With that said, a breakout beyond the daily resistance zone underlined above could trigger a move towards daily resistance at £0.8616.

Charts created using Trading View 

Written by FP Markets Chief Market Analyst Aaron Hill