Following the initial moves on Monday, FX markets have been relatively subdued so far this week. 

This likely reflects that a large degree of the risk was already priced in and the notion that geopolitical shocks tend to cause only temporary market disruptions. The fact that the attacks occurred at the weekend while markets were closed has also likely helped contain things and limited any immediate knee-jerk reactions. 

That said, the conflict has been broadening this week and we’ve not seen much in the last few days to suggest that a short, sharp conflict is in store. The US and Israel have been carrying out sustained air campaigns, while Iran has been responding with missile and drone attacks targeting Israeli and US assets across the Middle East, including in the UAE, Kuwait and Saudi Arabia.

President Trump has suggested that military operations could last four to five weeks, while Iran’s foreign minister has indicated there is “no limit” to the country’s right to self-defence. Polymarket is now assigning only around a 30% chance of an end to US military operations by the end of March, which is down from more than 80% in the immediate aftermath of Saturday ’s attack. 

Clearly among the main implications of the war is the fallout in oil. Brent crude oil prices have continued to rise this week and are up by over 5% today to $88 a barrel level from the $70 mark. Iran’s effective blockade of the Strait of Hormuz has reduced vessel traffic by around 90%. If the disruption persists, a move toward $100 per barrel cannot be ruled out.

Where we go from here will be highly dependent on the length of the conflict. There are many factors that could affect this but the extent of the depletion in Iranian missiles/drones might decide the speed of de-escalation from the Iranian side. From the US side, the level of political and market pressure Trump receives from home (given the upcoming midterm elections) could be key for deciding how long he wishes to continue fighting. 

For now, markets appear to be pricing a conflict lasting several weeks. As long as that assumption holds, and barring any more bad news, further USD gains may be relatively limited. However, a broader regional escalation and a prolonged closure of the Strait of Hormuz would no doubt create further risk aversion and therefore exacerbate the market reactions we’ve seen this week (i.e. higher oil prices, a stronger USD, and a sell-off in perceived ‘riskier' currencies (e.g. EUR and GBP)).

As a result, the GBP/USD trades around 1.8% lower than last week’s high and around half a cent off Tuesday’s low (which was a 10-week low). The Euro has weakened a lot this week (mainly due to their heavy reliance on LNG) with the GBP/EUR trading around 1.2% higher this week (a 1-mth high) and the EUR/USD down over 2% this week (trading around a 3-mth low).

Iran

FX markets relatively calm despite escalating Middle East conflict

The sharp military escalation over the weekend between the US/Israel and Iran, alongside the widening of the conflict across the Gulf region, has triggered a classic risk-off environment in financial markets.

Stock markets and risk currencies (e.g. GBP) have come under pressure, while traditional safe-haven assets (e.g. USD and Gold) have strengthened as investors seek safety. Furthermore, oil prices have surged (circa 8% as I write) as investors become concerned that supply routes will be disrupted (roughly one-fifth of global oil and LNG travels through the Strait of Hormuz). This spike in oil might have been higher had global inventories not risen so much over the past year following a year of oversupply and therefore the immediate impact hasn’t been so dramatic. However, if the conflict drags on, and supplies continue to be disrupted, then analysts believe there’s scope for energy prices to rise further which could reignite global inflation and send the global economy into a tailspin once again.

As a result, the GBP/USD has continued its fall from the back end of last week (where FX markets had started to price this war in) and dipped around 1% earlier to a 10-week low. The GBP/EUR is steady this morning but still trading close to the lower end of where it’s been in the past 10-weeks. The EUR/USD has fallen around 1-cent this morning and currently trades around a 5-week low. 

Looking ahead, there are some important data releases this week including EU inflation (Tues) and EU GDP, US retail sales, and US non-farm payroll data (all out on Fri). However, all eyes will remain focused on the situation in the Middle East and these geopolitical developments likely continue to dominate the sentiment in the near term.

Carrier

Safe havens rally as US–Iran conflict drives risk aversion

Sterling has weakened today following the latest Bank of England rate decision and rising UK political uncertainty.

As expected, the BoE voted to keep interest rates on hold at 3.75%. However, the vote split was more dovish than expected, with four of the nine policymakers opting for a rate cut versus expectations of two. They also downgraded the growth forecasts for the next two years and warned the economy was now in danger of a sharp jump in unemployment. Together, this has increased the odds of a less gradual downward path of cuts form the BoE which has led to some Sterling weakness.

Earlier today, the Pound had already fallen sharply amid growing pressure on Prime Minister Keir Starmer. He is facing mounting criticism within his own party over his decision to appoint Peter Mandelson as US ambassador, despite his links to Jeffrey Epstein. Markets seem to be bracing for the possibility of a leadership challenge - with some research companies suggesting a roughly two-thirds chance he could step down in 2026 (up from around 51%). Angela Rayner is currently the bookies favourite to win any leadership contest which is seen as a potential risk to Sterling given the likelihood of a shift further to the political left.

In other news, the USD has continued to recover from recent losses. This follows the announcement of Trump's pick for the new Federal Reserve Chair role - Kevin Warsh - who is generally perceived as a more hawkish than the other main contenders. Additionally, the latest Fed meeting was generally more upbeat tone which has reduced expectations for aggressive US rate cuts. Finally, comments from US Treasury Secretary Scott Bessent have helped calm concerns that Trump’s earlier remarks signalled a deliberate policy push towards a weaker USD.

As a result, GBP/USD has fallen by nearly one cent today and is now around three cents lower than last week’s high, trading at a 13-day low. GBP/EUR is down approximately 0.75 cents on the day and around 1% lower from yesterday’s high, trading at an 8-day low.

DOwning street

Sterling falls on BoE and Starmer pressure

The Pound has risen this morning following better than expected UK services and retail sales figures. 

UK releases this week have been mixed but generally supportive. Tuesday saw a weaker UK jobs report but this was offset by Wednesday’s surprise upside in inflation for December. Then this morning we’ve had a better-than-expected UK retail sales figures for December (2.5% vs expected 0.1%) and, importantly, a strong services (PMI) survey data which is a forward-looking data set (54.3 vs expected 51.7). 

The resilience in consumer spending and improved sentiment across the service sector may reflect some post-budget relief, with tax rises less severe than initially feared. Taken together, this week’s data is likely to limit the dovish tone from the Bank of England which has been supporting for Sterling. Markets still expect the next rate cut to be either April or June subject to how inflation data goes over the next couple of months. 

In other news, President Trump delivered a U-turn on his proposed Greenland tariffs this week. As mentioned in our last update, markets have become numb to these threats with his bark seemingly always worse than his bite, so this wasn’t too unexpected. However, I think most investors have been quite surprised at how quickly this reversal came about this time around. The initial reaction was a slight reversal of the early week “Sell America” trade with the USD, US stock market and Treasuries recovering some of their earlier losses. However, a full snap-back has yet to materialise. This is likely because the initial relief has been replaced by longer-term concerns. Trump has been vague on Greenland deal/framework details so far and negotiations may well drag out. Furthermore, this whole episode once again highlights the unpredictability and erratic decision making of Trump’s which does nothing to promote a smooth world order (the antithesis of what market participants crave). 

As a result, the GBP/USD has pushed up nearly 1% from yesterday's low and is towards the higher end of where it’s traded since September. The GBP/EUR has also clawed back some ground and up nearly a cent from Wednesday’s low but still caught within familiar ranges. The EUR/USD remains buoyant and towards the higher end of where it’s traded so far this year. 

Next up we have US PMI figures out this afternoon and the Federal Reserve will be announcing its latest policy decision next week. We’re not expecting any change in US interest rates though and we do not expect Chair Powell to hint at an imminent cut either, which may provide a bit of relief to the USD. 

trump tariff

Sterling improves on services & retail data. Trump U-turns on Greenland

President Trump’s renewed push to acquire Greenland has reignited fears of transatlantic trade tensions.

The UK and several other European countries face a proposed 10% US import tariff from the 1st February if no deal is reached over Greenland and this will rise to 25% if no deal is achieved by the 1st June. As we know, Trump has a track record of using these tariff threats as a negotiating tactic and a blunt instrument to get his way on the global stage. However, Denmark clearly has no interest in selling and Europe doesn't appear to want to back down on Trump’s demands this time around. 

So far, market reaction has been relatively muted and currency markets are not yet signalling a renewed “Sell America” trade. I guess we've been here many times before and, for the most part, Trump’s most aggressive tariff threats have either failed to materialise or been rolled back quickly. Therefore, it seems the base case scenario for many investors is to expect a similar outcome this time around (i.e. Trump’s bark is worse than his bite). That said, given the unpredictability of the Trump administration, nothing can be taken for granted and the issue is likely to remain a key driver of sentiment in the near term.

In other news, UK growth and industrial production data surprised to the upside last week. November GDP rose by 0.3% versus expectations for 0.1% growth. However, while this data is encouraging, monthly GDP data tends to be very volatile and the lag in October suggests that the economy would have only grown by around 0.1%-0.2% in Q4 2025. Even so, markets have pared back expectations for future BoE rate cuts, with the next 0.25% cut not fully priced in until June this year. 

As a result, the GBP/USD touched the lower end of where it's traded so far this year but has since clawed back around half a cent to low 1.34s (market rate). The GBP/EUR rate has started the year positively but has been caught in a tight 0.5 cent range over the past week (low 1.15s). The EUR/USD is down just over 1% from the start of the year.

Looking ahead, along with developments over the Greenland situation, markets will focus on UK labour data (Tues), UK inflation (Weds) and the forward-looking PMI data sets from the UK, EU and US (Fri).

Greenland

Trump’s Greenland gambit revives trade war concerns

Despite all the doomsaying prior to Budget announcement, the pound has performed quite well since Wednesday and gilt yields have edged lower.

Markets appear to be reassured by the larger-than-expected fiscal headroom (more than double that afforded by the chancellor last year) and the lack of any real surprises in the tax announcements. A larger headroom should reduce the chances that Labour will need to raise taxes again this time next year, which is providing some comfort to markets.

However, notable risks remain. Most of the tax hikes that were unveiled are backloaded (e.g. freeze to income tax thresholds), which means that it will be while before these revenues are actually realised. Furthermore, it’s very difficult to see where the growth comes from in the budget, which is concerning given the OBR’s recent downgrades to both their growth and productivity medium-term forecasts. The additional £26bn annual tax burden (on top of last year’s £40bn) will add further pressure onto struggling households and businesses. Market expectations for a December BoE interest rate cut have now risen to around a 92% chance.

In other news, growing expectations of another Federal Reserve rate cut in December (now priced in around 80%) continues to weigh on the USD. US data has been on the softer side of late and recent reports suggest that Kevin Hassett, a close Trump ally, has emerged as the leading contender to become the next Federal Reserve Chair. He’s considered the most dovish candidate in the field and therefore more likely to push for lower US interest rates. The market reaction off the back of this news story has been relatively contained so far, however, we expect that speculation around the Fed leadership will intensify as the current Chair’s term approaches its end in May.

As a result, the GBP/USD has risen around 1 cent since Wednesday and trades close to a 4-week high. It will be interesting to see how this currency cross moves as the BoE and Fed both now look certain to cut rates at their meetings next month. The GBP/EUR is around 0.75% higher and is trading at a similar 4-week high.

Parliament

Sterling holds firm after Autumn Budget but risks remain

The Pound is poised ahead of today’s pivotal Autum Budget.

Uncertainty surrounding the announcement is very high. Chancellor Reeves needs to convince markets that she has both a credible plan to revive growth while also a long-term plan to stabilise the public finances. Any feelings that their strategy lacks a path back to stability, or if what announced looks to damage growth, then we might see markets quickly react to this. For example, any sizable spending hikes (e.g. large increases to welfare) combined with increases to borrowing would be a red flag to markets and, consequently, sterling and gilts (government bonds) would likely be heavily sold off.

Furthermore, the Budget is also likely to have an impact on the BoE interest rate expectations. Any signs it will hamper UK growth will raise expectations for more aggressive rates cuts from the BoE in a bid to try and get ahead of any future downturns in the economy. More aggressive rates cut (dovish stance) is a negative for the Pound.

So far, Sterling has traded in a reasonably tight range against the USD ahead of today’s Budget. This may signal that investors are reluctant to commit to any sizable positions before Reeves speaks later today (12.30ish). Options markets tell an interesting story, however, with the Financial Times yesterday reporting that GBP put options were dwarfing call options by a ratio of four to one, suggesting that traders see a greater chance of sterling downside than upside post-announcement. Watch this space.

In other news, the USD was on the back foot yesterday following the release of some weaker than expected US economic figures (retail sales, consumer confidence, and producer price growth), which has raised the chances of another Fed interest cut in December. Futures are now pricing in around an 80% chance of a cut versus around a 30% chance only a matter of a few days ago).

Markets poised ahead of key Autumn Budget 

Sterling has dropped nearly 0.5% today after the latest UK inflation figures came in below expectations.

The data showed the headline CPI rate for September at 3.8% (vs forecasts for 4.0%) and the core rate at 3.5% (vs forecast for 3.7%). Although inflation remains well above the BoE’s 2% target, the downside surprise has increased market expectations for a rate cut in December (now around 70% priced in vs <50% yesterday), which has weighed on the Pound today. The upcoming Autumn Budget (26th Nov) could prove pivotal on this. Should Chancellor Reeves announce tax-heavy, growth-dampening measures, then this could prompt the Bank of England to cut rates pre-emptively to try and get ahead of a weakening economy.

We also had some further bad news on the state of Britain’s public finances yesterday. September’s borrowing figures showed the UK government borrowed £99.8 billion in the first half of the financial year, which, if we exclude the global pandemic, is the highest amount of credit drawn by the government in over three decades. Needless to say, this adds even further pressure on the Chancellor and markets will be hoping that Labour can present a credible plan to bring down Britain’s large-scale reliance on borrowing.

Elsewhere, the dollar has been well supported so far this week amid easing fears over the state of the US credit market. However, concerns surrounding the US-China trade talks and the ongoing federal closure could put a cap on the USD’s advance. President Trump suggested this week that his meeting with President Xi may not go ahead as planned. While this far from rules out the striking of an agreement, it has dampened hopes of a near-term breakthrough. The US government shutdown has continued and scepticism remains over how much longer this may last. Yesterday, the reported frontrunner for the next Fed Chair role, Kevin Hassett, suggested there will be a possible resolution by the end of this week. However, betting markets imply the shutdown could last for another few weeks!

As a result, the GBP/USD rate is trading around 1% down from last week’s high and currently sits at a 1-week low. The GBP/EUR is down 0.5% today and trades around the lowest levels since Friday. Markets will turn their attention to Friday’s US CPI report which is the first major US release in weeks. With data releases being severely limited due to the US shutdown, this report is likely to carry more weight than usual and could reframe expectations for both Fed policy and broader risk sentiment. Friday will also see the latest UK retail sales figures and PMIs from the UK/EU.

INflation 

Pound drops as UK inflation miss revives December rate cut bets

Sterling fell sharply yesterday as investors panicked following a rout in the gilt market.

Gilts are bonds issued by the UK government to raise funds through borrowing. Yesterday, the yield required on 30-year gilts jumped to the highest level since 1997 (5.7%+) and the 10-year gilts traded to the highest levels of 2025 (4.8%).

While rising global yields are part of the broader trend, it's the rapid pace of change in UK yields that has spooked investors, which has led to Pound weakness. The key driver appears to be mounting concerns over the UK’s public finances, given the massive shortfall between government spending and income, which will likely force further tax hikes in autumn. The issue is that the further gilt yields continue to climb, the larger the government borrowing costs would become and therefore the greater the tax hikes would need to be to plug the gap. This type of dangerous cycle risks destabilising the UK economy if it takes grip. All eyes will be on Chancellor Reeves’ next steps and how the market continues to react.

Over the pond, higher Treasury yields have been supportive for the USD so far this week because (unlike in the UK) the moves have been orderly. Additionally, weakness in the Pound and Japanese Yen have increased flows into the USD. Despite news over the weekend that most of Trump’s tariffs have been ruled illegal, the USD remains strong, as investors see little chance that they will be revoked. The main focus this week will be on Friday’s nonfarm payrolls figures, particularly after the disappointing figures last month. Aside from the headline reading, the key thing to look out for will be whether we see any further downward revisions to previous data, as we’ve in each of the last six months.

As a result, the GBP/USD fell close to 2-cents yesterday and hit a 4-week low this morning. The GBP/EUR dropped just under 1-cent yesterday and traded close to a 4-week low.

News