Sterling Holds Firm as Rate Expectations and Geopolitical Tensions Drive Currency Markets
GBP
Sterling was broadly steady on Tuesday, despite a stronger US Dollar and ongoing geopolitical concerns around the Strait of Hormuz. GBP/USD remained above the 1.3500 level, although the pair has struggled to build on last week’s move towards the 1.3650 area.
The Pound has been supported by a more hawkish Bank of England outlook. Last week, the Bank of England kept interest rates on hold, but signalled that further rate rises could be needed if inflation pressures remain persistent. This has helped Sterling outperform many other major currencies during the recent period of market uncertainty.
Markets are now pricing in further Bank of England rate hikes this year, which has added support to the Pound. However, there are still risks. UK local elections on Thursday could create political uncertainty if Labour performs poorly, while higher interest rates may also put pressure on the UK economy over time.
EUR
GBP/EUR moved higher last week, briefly reaching the 1.16 area before easing back slightly. This level has acted as a key resistance point, with the exchange rate struggling to hold above it on a sustained basis.
The Pound has been supported by the interest rate gap between the UK and the Eurozone. UK bond yields remain elevated compared with the Eurozone, helped by the Bank of England’s more cautious stance on inflation.
For now, Sterling remains well supported against the Euro. However, a clear move above 1.16 may require fresh momentum, with UK political developments, market sentiment, and Bank of England rate expectations likely to influence the next move.
USD
The US Dollar has continued to benefit from safe-haven demand as tensions remain high around the Strait of Hormuz. Escalation in the region has raised concerns over global shipping disruption, oil supply, and inflation.
Higher oil prices matter for currency markets because they can feed through into inflation. If inflation remains sticky, central banks may be forced to keep interest rates higher for longer. This has supported the Dollar and limited the upside for GBP/USD.
Attention now turns to key US data, including services activity, job openings, new home sales, and Friday’s Non-Farm Payrolls report. Stronger US data could support the Dollar further, while weaker figures may give Sterling some room to recover.
If you have upcoming currency requirements and would like expert guidance on navigating the markets, contact one of our consultants at 020 3876 5432.