Sterling dips as central bank decisions, Iran war uncertainty in focus

By Sophie Kiderlin

LONDON, April 28 (Reuters) - Sterling eased against a stronger U.S. dollar on Tuesday as market attention focused on central bank action, including from the Bank of England, while uncertainty over the Iran war persisted.

The British pound was last 0.3% lower against the dollar at $1.3488, and little changed against the euro at 86.55 pence.

The Bank of England on Thursday is expected to keep interest rates steady, but markets will be paying close attention to any guidance or comments from the central bank about how the Iran war may impact the economy, and monetary policy. "In our view, only the most hawkish rate setter on the 9-person Monetary Policy Committee (MPC), will vote to raise interest rates to mitigate this improbable risk on Thursday, 30 April. The remainder will be content to just say that they are "willing to act,"" Andrew Wishart, senior UK economist at Berenberg, said in a note.

"The two interest rate hikes priced in have already dampened economic activity, which reduces the likelihood that the BoE will follow through with actual rate hikes," he added. Wishart noted that the central bank may instead return to cutting rates by the end of the year.

Money markets have been sensitive to developments in the Iran war since it began. As higher energy prices sparked inflation expectations and growth fears emerged, traders increased bets on rate hikes from the BoE.

Besides the BoE, various other major central banks are set to stay on hold this week, including the European Central Bank and U.S. Federal Reserve. Elsewhere, hopes of a resolution of the conflict in the Middle East were dampened. U.S. President Donald Trump is unhappy with the latest Iranian proposal on resolving the two-month war, a U.S. official said.

Markets also kept domestic politics in the back of their mind, with Prime Minister Keir Starmer facing criticism for appointing Peter Mandelson as ambassador to the U.S. Upcoming local elections are expected to add to the pressure on Starmer, with his Labour Party set to suffer large losses, and could trigger questions over his leadership.

Analysts have warned that the political uncertainty could put pressure on the pound.

(Reporting by Sophie Kiderlin, editing by Keith Weir)