The British pound has experienced significant volatility and a notable weekly recovery, driven primarily by shifting geopolitical tensions in the Middle East. Sterling edged higher against the US dollar, retaining most gains from a session following a ceasefire agreement announced between the United States and Iran. The pound was last trading 0.1% higher at $1.3407, well above pre-ceasefire levels below $1.33, though it retreated from a Wednesday peak of $1.348.
The ceasefire, announced by US President Donald Trump, includes the reopening of the strategically vital Strait of Hormuz, a passage for approximately 20% of global oil and liquefied natural gas shipments. This development led to a sharp 0.7% rally in the pound on Wednesday and set the currency on track for a 1.7% weekly gain—its strongest performance since mid-January.
However, market optimism remains cautious and fragile. Uncertainty surrounds the durability of the deal, with Trump later criticizing Iran for doing "a very poor job" of allowing oil shipments. Ongoing instability is underscored by continued Israeli strikes in Lebanon and Iran's earlier signals that it would not agree to any deal as long as those strikes persisted. Analysts from Lloyds Bank, Sam Hill and Nicholas Kennedy, noted that financial markets are taking a "wait-and-see" approach, pinning hopes on positive developments from upcoming negotiations scheduled in Pakistan.
The US dollar strengthened throughout the initial conflict, supported by perceptions that the American economy, as a net energy exporter, is less exposed to geopolitical turmoil and energy market disruptions compared to import-reliant regions like the United Kingdom. This dynamic made sterling and other European currencies highly sensitive to geopolitical headlines. The conflict, which began on February 27, had previously driven a surge in energy prices, a broader global equity sell-off, and a flight to the safety of the US dollar, causing sterling to drop 1.9% against the dollar in March.
Francesco Pesole, a currency analyst at ING, linked sterling's performance to equity market movements and diverging monetary policy expectations. He noted that the Bank of England was "already ready to cut before the war began," suggesting that expectations for UK interest rate reductions could weigh on sterling relative to the euro in the longer term. As risk appetite has tentatively returned, the US dollar index is on track for its largest weekly decline since mid-January, with investors rotating out of the safe-haven currency.
