The British pound weakened against a basket of major currencies during European trading on Thursday, pulling back from a two-month high against the US dollar as investors engaged in profit-taking following its strongest daily gain since March, supported by growing optimism over recent political developments in the United Kingdom.

The recent rise in oil prices has intensified inflationary pressure on Bank of England policymakers, reinforcing expectations that UK interest rates could increase in the near term as investors await another round of key economic data.

The Price

The pound slipped about 0.15% against the US dollar to $1.3520, from the day's opening level of $1.3537, after reaching an intraday high of $1.3545.

Sterling climbed 1.1% against the US dollar on Wednesday, marking its second consecutive daily gain and its strongest one-day advance since March 19, while reaching a two-month high of $1.3558.

Political developments

Andy Burnham moved closer to becoming the UK's next prime minister amid growing expectations that the incoming government will pursue a more stable fiscal policy, boosting investor confidence in British assets.

Reports also suggested that Shabana Mahmood is set to become Chancellor of the Exchequer, a development welcomed by markets, as she is viewed as more fiscally disciplined than some of the other candidates previously considered for the role.

Investors believe the new UK government is likely to maintain fiscal discipline and limit public spending and borrowing.

US dollar

The US Dollar Index rose 0.1% on Thursday as the greenback attempted to recover from a one-month low against a basket of major currencies.

Demand for the US dollar as a safe-haven asset increased as military exchanges between the United States and Iran continued to escalate, while shipping activity through the Strait of Hormuz remained subdued, heightening concerns over potential disruptions to global oil supplies.

Iran conflict updates

The United States launched a new wave of airstrikes targeting Iranian coastal defense positions and missile launch sites.

Iran declared that the current confrontation represents an "existential war" and pledged to continue responding to US military operations while warning that it could expand measures affecting regional energy exports.

The US naval fleet, consisting of 20 warships and hundreds of military aircraft in the region, continues to intercept vessels traveling to and from Iranian ports.

Traffic through the Strait of Hormuz declined to just seven vessels, down from 13 the previous day, with supertankers and LNG carriers completely absent from the shipping lane.

US President Donald Trump said Iran "wants to reach a settlement," but stressed that any return to negotiations would require a change in Tehran's behavior.

Iran, meanwhile, insists it will not return to any previous understandings as long as US military operations continue.

UK interest rates

Rising oil prices have pushed market pricing for a Bank of England interest rate hike at the July meeting above 35%.

UK economic growth

To reassess those expectations, investors are awaiting the release of UK economic growth data later today, which could influence the Bank of England's monetary policy outlook.

Monthly GDP data is due at 06:00 GMT and is expected to show growth of 0.1% in May, following a 0.1% contraction in April.