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There is growing hope that the conflict in the Middle East is reaching an end. How would the pound be affected in this scenario?
Last updated: 23 March 2026
US President Donald Trump signalled a five-day pause in air strikes against Iranian energy infrastructure just before markets opened in New York on Monday morning. That was after giving Iran a 48-hour ultimatum to end the war (a window that coincided suspiciously neatly with the weekend close, but we won’t get into that here).
The significant climbdown drew a collective sigh of relief from global markets, previously buffeted by uncertainty and risk caused by the war. Oil futures fell by almost ten cents in the space of one hour and the US dollar weakened by half a cent against its European rivals in just a few minutes.
Things have been moving fast in recent weeks. In today’s quick take article, we look at what these changes mean for the pound and whether they will cause the Bank of England to change its course yet again.
How will this affect inflation?
This morning, traders had been betting that the Bank would have to raise interest rates by a full 1% across 2026 to contain the predicted surge in prices. That was because elevated oil and gas prices would not only increase energy bills for consumers, but also impact input costs across a range of industries, not to mention add risk for insurers and travel companies.
Before the war, Andrew Bailey and fellow policymakers had signalled that headline inflation would hit the 2% target by the middle of this year. Does today’s announcement mean we’re back on that path? The answer is not quite. While the temperature has gone down, shipping traffic in the strait of Hormuz remains at a standstill. Oil remains about $40 per barrel more expensive than a month ago and it will take some time to restore supplies and convince transportation and insurance companies it’s safe to traverse. Only then is the price likely to normalise.
How has the pound reacted?
Sterling reversed some of the US dollar’s recent gains as the news broke. You can see in the chart below how sudden the upward movement was.
Even if the flow of oil takes time to resume, an end to the war would be a clear net positive for the UK economy and therefore the pound. Yields on UK government debt, which move inversely to their price, feel significantly today, reflecting the more positive outlook.
GBP/USD: Monday 23 March
Huge questions remain
Despite the president’s claim of “good and productive conversations” with the Iranian regime, government officials are yet to acknowledge the supposed talks took place at all. That raises the question of whether Trump is simply looking for a palatable off-ramp to the conflict, one that might ultimately not be honoured by either Iran or Israel.
There is also the sizeable challenge of restoring the flow of oil through the Gulf and getting regional power infrastructure damaged in the war back up and running. These considerations mean UK businesses should not jumping for joy just yet.
Until we reach a clear, mutually agreed resolution, it’s likely that key currency pairs will move unpredictably. If we do get a lasting ceasefire, the pound might also be affected by the shifting interest rate outlook. Businesses should be aware of the risks and have robust risk management strategies in place that protect their profit margins and cashflow. That’s where we come in.
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