The pound is trading at the highs of the day as the US dollar gives back most of the big rally on Friday.The market is beginning to take a more-constructive view on the duration and impact of the Iran war, though it's certainly a subject to change on any given headline.In the past few minutes, video of a drone hitting (or near) the US embassy in Baghdad was published. It showed a large explosion that undermines the idea that Iran's military has been wiped out. Iran's parliamentary speaker Qalibaf also said the Strait of Hormuz situation won't return to the status quo.The market is watching for signals in the UK economy as the Bank of England lurches towards a rate hike. The market sees almost no scope for a move on rates this week or in April. However there are now 13 bps of hikes priced in through year end.Obviously, that will be highly dependent on energy prices. Brent is up $3.26 to $103.50 today and up 70% since the start of the Iran war. It's similar in the natural gas market and every day the war persists will lengthen the lead times for a restart of production..A major concern is rising gilt yields as UK 10-year borrowing costs have jumped to 4.70% from 4.30% at the start of the war.In terms of recent data, CPI came in at 3.0% year-over-year for January, down from 3.4% in December. That was the lowest reading since March 2025 and bang in line with expectations. Core ticked down to 3.1% from 3.2%, while services inflation eased marginally to 4.4% from 4.5%. The direction is right but these are still uncomfortable numbers when your target is 2%. The most recent unemployment reading was 5.2% for the three months to December 2025, released on February 17. That was a tick above expectations of 5.1% and the highest since early 2021. If that continues to climb, it could put rate cuts back in play but it will be a tough balancing act for the BOE. This article was written by Adam Button at investinglive.com.