Markets have rallied sharply following the announcement of a two-week ceasefire between the US and Iran whilst they negotiate a lasting peace deal. 

Given the de-escalation, the relief across global markets has been immediate and dramatic. Oil prices have tumbled and equity markets have surged on expectations of a resumption of oil and gas flows through the Strait of Hormuz. The drop in oil prices is being described as the biggest one-day fall since the 1991 Gulf War with Brent Crude falling by around 16%. The USD has also been heavily sold as the safe-haven demand that has underpinned it throughout the conflict quickly evaporated and as traders recommenced pricing in Federal Reserve interest rate cuts for later this year. 

Peace talks are due to begin on Friday in Pakistan and may be extended if both parties agree, which gives some hope that this is more than just another pause. That said, it’s important to not get too getting carried away as there's still a risk that the war could restart any time, as they’ve not officially ended the hostilities. Furthermore, some of the proposed demands from both sides could prove too difficult to overcome in the talks. 

As a result, the GBP/USD has moved 2-cents higher from yesterday evening and trades closer to the higher end of where it’s traded since the onset of the war. The EUR/USD rallied over 1.5% and trades around a 5-week high. The GBP/EUR has moved to an 8-day high after gaining half a cent from yesterday's low. 

Markets will be closely watching how the peace talks develop over the next two weeks. If genuine progress is being made and the Strait fully reopens, then there’s a chance we might see further USD weakness and a continued recovery in risk currencies. However, if talks stall or fighting resumes, the moves seen over the past six weeks could quickly return.

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Markets surge and USD weakens as US and Iran agree two-week ceasefire

Markets remain in a cautious mood as the Iran conflict enters another week with no clear resolution in sight and as rhetoric from President Trump ramps up. 

Over the weekend, Trump threatened to take Iran “back to the stone ages” with attacks on key civilian infrastructure (such as bridges and power stations) if a deal to reopen the Strait of Hormuz isn't reached before tonight's 1am deadline. This morning, he doubled down on these threats stating that “a whole civilisation will die tonight, never to be brought back again” if a deal isn't made. There is still hope that things will de-escalate but the next 24hrs look to be pivotal. 

So far, financial markets have taken the latest threats largely in their stride having become rather numb to Trump’s pattern of alternating between threats and deadline extensions. Oil prices remain elevated and equity markets are generally down today, but both remain poised to react depending on events on the ground.

In other news, Friday’s US non-farm payroll and unemployment data came in better than expectations. So far, there are few signs that the Iran war and the spike in oil prices are having a meaningful impact on the US economy. However, this Friday's US inflation report (CPI) will be the first to fully capture the war's impact on energy prices and should provide a much clearer picture.

Either way, a divergence between the US and Europe is becoming more apparent. Early Eurozone inflation and sentiment data points to a significant stagflationary impact from the war (i.e. high inflation and slow growth). Headline inflation spiked to 2.5% in March from 1.9% the month before and the markets are pricing in nearly three hikes from the ECB this year. In the UK, markets are currently pricing in two BoE rate hikes before the end of 2026 and, with the UK economy and labour market already in a fragile state, the BoE will be wary of hiking interest rates too aggressively to avoid tipping the economy into a recession. 

As a result, the GBP/USD remains subdued but around 1cent above last week’s low. The GBP/EUR trades in a relatively tight range but towards the lower end of where it’s been over the past 5-weeks. As before, Iran war developments will remain the dominant market driver and any credible signs of de-escalation could trigger a sharp drop in oil prices, a move away from safe haven currencies (e.g. USD) and vice-versa if things escalate instead.

Iran US war

Markets on edge as Trump issues most severe threats yet ahead of tonight's deadline 

Markets are on edge this morning after a dramatic escalation in the Middle East conflict overnight with Gulf energy infrastructure being targeted and rhetoric ramping up from President Trump.

Yesterday, Israel launched strikes on Iran’s South Pars which is part of the world's largest natural gas field. Iran then retaliated overnight attacking Qatar's Ras Laffan natural gas processing complex twice within 12 hours causing extensive damage. Other missile and drone strikes have also been seen/intercepted in other Gulf State energy plants such as Kuwait, UAE, and Saudi Arabia.

Trump responded to say that there would be "no more" Israeli attacks on South Pars, but warned that if Iran "unwisely decides to attack” Qatar again, the US would "massively blow up the entirety of the South Pars Gas Field at an amount of strength and power that Iran has never seen or witnessed before." The threat has sent shockwaves through markets with crude oil prices surging up to $118 per barrel and some big falls in major stock markets. 

Analysts have warned that damage to key gas processing facilities of this kind could take months or years to repair, potentially triggering a long-lasting global gas shortage. Europe remains particularly exposed given its reliance on LNG imports and, consequently, European stock markets have seen some of the more significant falls this morning. The situation is fluid and markets are currently pricing in a prolonged disruption to Gulf energy flows. Any sign of de-escalation could trigger a sharp reversal in oil prices and a shift in currency rates (away from perceived safe havens, such as the USD). Until then, volatility is likely to remain elevated and risk appetite fragile.

In other news, as widely expected, the Federal Reserve kept interest rates on hold last night and they highlighted that uncertainty over the economy remains high and that the full impact of the war is still unclear. Later today, both the BoE and ECB are widely expected to keep interest rates on hold. However, the tone of the accompanying statements will be closely watched given that oil-driven inflation is complicating the path back to their target inflation levels.

As a result, the GBP/USD fell a cent overnight and currently trades around 0.5cent from the lows seen last week (i.e. the 3-mth low). The EUR/USD is down a cent from yesterday’s high and close to the lowest levels since the start of August last year. The GBP/EUR remains buoyant but caught within the familiar range we’ve seen this past week. 

Gas plant

Oil rises after Trump threatens to obliterate Iran's gas fields

Markets remain turbulent after we saw the most volatile day in oil trading history yesterday. 

Brent crude prices spiked to nearly $120/barrel yesterday morning (see chart below) - its highest levels since June 2022 - as the Iran war escalated over the weekend. Markets grew increasingly concerned about the possibility of a prolonged disruption to oil shipments through the Strait of Hormuz.

However, market sentiment improved later in the day after reports that G7 nations are considering a coordinated release of emergency oil reserves in an effort to stabilise prices. The speculation alone was enough to cool the rally in crude oil prices. Then last night we had comments from Trump hinting that the operations against Iran could end soon, stating that "the war could be over soon”. This triggered a further relief rally, as traders began to look ahead to a possible de-escalation, which led to oil prices dipping back down to around $90, a surge in equity markets, and a weaker USD. 

As a result, the improved market risk appetite has pushed the GBP/USD up nearly 2-cents from yesterday's low and it currently trades around a 10-day high. The GBP/EUR remains buoyant and continues to trade around a 1-mth high. The EUR/USD has rallied around 1.3% from yesterday’s low and hit a 1-week high this morning.

Looking ahead, there are some key data releases to come out this week, such as US inflation (tomorrow) and UK/USD GDP (Friday). However, these releases may attract less attention than usual as the data is pre-war and therefore old news. Instead, markets will likely remain focussed on developments in the war this week with a bit of an eye on next week’s central bank meeting bonanza (Fed, BoE and ECB) to hear their initial thoughts on the US-Iran conflict and how it may influence the outlook for monetary policy decisions. 

Oil tanker

Oil swings drive FX moves as traders eye potential de-escalation

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).

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