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Not a cloud in the sky above the Bank of England yesterday
Sterling gained across the board yesterday, including well over 1% against the US dollar, Canadian dollar, rupee, baht and others. Gains against the euro were limited to around 0.25%, but only because the euro was itself flying high.
The prompt for sterling’s boost was the Bank of England (BoE) abandoning its hopes to cut interest rates this week. The Bank’s Monetary Policy Committee (MPC) unanimously opted to hold rates, faced with the likely inflationary effect of the war in Iran. We haven’t seen such unanimity for a while, and it extended all the way to Frankfurt, where the European Central Bank (ECB) also held rates.
Alongside news of the latest threat to energy supplies from the Middle East, the markets had some data to analyse yesterday and this morning. Unemployment remained steady in the UK at the multi-year high of 5.2% and while earnings were rising at their lowest rate for five years, at 3.8%, that’s still above inflation.
This morning it’s been revealed that government borrowing in February was at a much higher level (not far off double) than expected. Following on from 0% growth of the UK economy at the start of 2026 reported last week, and unemployment, this piles pressure on the chancellor Rachel Reeves.
However, interest rates remain the big story as householders and businesses face up to the war in Iran already costing them thousands, quite aside from the obvious fuel cost. Markets are now suggesting that instead of a couple of interest rate cuts this year the BoE will be making two or three rate rises.
The effect on currencies so far has been muted (even yesterday’s boost against the USD only returns it close to pre-Iran levels), with some of the quietest trading in GBP/EUR for months. However this is indicative of the markets having little idea which way to jump.
It is unlikely to last.
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GBP: Resurgent pound, but data danger remains
GBP/USD was heading back to its pre-Iran-attack position yesterday, gaining some 1.4%, after the Bank of England altered course on interest rates. However, next week is a busy one for data and little of it has been going the chancellor’s way of late. On Tuesday we have PMI, on Wednesday inflation and on Friday retail sales. Could there be anything there to end the recent GBP/EUR stability?
GBP/USD past year
EUR: Euro stays steady
The ECB is dealing with the same uncomfortable trade-off: higher energy costs can lift inflation in the short term, but they can also sap growth. Traders have been focused on what its interest rate setters will do next and whether the energy shock starts to show up in hard numbers. That will probably start on Tuesday with PMI results across the bloc.
GBP/EUR past year
USD: Safe haven appeal weakens
The dollar’s sharpest decline yesterday was against the pound, taking us close to where we were before the conflict in Iran began. There were smaller losses to fellow safe havens the Swiss franc and Japanese yen, but it does appear that the mood has turned less risk off. It’s a quiet day on the wires today, and indeed next week, but over the weekend Fed Chair Jerome Powell will be talking.
USD/GBP past year
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