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The pound came under pressure alongside the conflict in Iran and the spring statement.
The pound teetered on Tuesday as the rapidly escalating crisis in the Middle East ripped its way through commodities and into currencies and government debt.
Sterling fell to its lowest level against the US dollar since early December. Gilt yields meanwhile shot up, making borrowing more expensive and threatening to undo much of the government’s recent progress on spending.
Rachel Reeves must have been cursing her luck. In truth, the timing of this year’s spring statement couldn’t have been much worse. The chancellor delivered a cautious statement to parliament amid bubbling market turmoil, opting against announcing any new policies and focusing on the fiscal headroom.
The Office for Budget Responsibility (OBR) issued updated economic forecasts alongside her address. The OBR downgraded its 2026 growth projections from 1.4% to just 1.1% and now expects unemployment to peak higher. At the same time, it reduced its government borrowing forecast by £6bn for this year and said borrowing as a percentage of GDP would fall faster than expected. Crucially, those assessments were made before the air strikes began at the weekend. That was the one element of luck when it came to timing.
But perhaps the most significant correction was in the Bank of England’s outlook for the remainder of this year. We haven’t heard much from the Bank itself this week, but financial markets have sharply adjusted their interest rate assumptions for this year. As of yesterday evening, they now expect just one cut across the whole of 2026, down from at least two at the start of the week.
The conflict in the Middle East snowballed yesterday. Israel and the United States attacked Iran-supporting targets in Lebanon, while US diplomats warned of an attack on the headquarters of the Saudi state oil company, Aramco.
Stocks fell again across the globe while Brent crude zipped up towards $85 to the barrel. Some analysts believe this could reach $100 in the coming months, a scenario that would materially impact the inflation outlook across the UK and Europe.
Consumer price inflation unexpectedly climbed to 1.9% in the eurozone last month. That leant more credence to the hawkish narrative for the European Central Bank that has built since the outbreak of the conflict.
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GBP: Bank in a bind
The Bank of England must chart a course through another crisis. Should the conflict in the Middle East persist, it may find cutting interest rates at the pace we expected just weeks ago to be a stretch. For now, the pound is facing a volatile outlook.
GBP/USD: the past year
EUR: A tax on Europe
An interesting research note from Deutsche Bank yesterday highlighted the correlation between the euro and the price of energy. Essentially, for every 10% rise in the price of oil, there has been a 0.8% decline in EUR/USD since 2017. That’s because markets view energy costs as representing a tax on European consumers paid in US dollars.
GBP/EUR: the past year
USD: Data test
After benefitting from the crisis in the Middle East, the US dollar faces a couple of tricky labour releases before the week is out. Non-farm payrolls and unemployment data could knock the dollar from its perch after strengthening by nearly 2% against its main rivals since the start of the week.
EUR/USD: the past year
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