020 7898 0500
The Federal Reserve set a hawkish tone last night, and now it is the Bank of England and the European Central Bank’s turn to show their hand. All three central banks are grappling with the same problem: the oil shock from the conflict in Iran has thrown their plans into disarray.
The Fed held interest rates steady in an 11–1 vote yesterday evening, but it was Chair Jerome Powell’s press conference that moved markets. He warned that inflation progress has been slower than hoped and that energy-driven price pressures cannot be treated as temporary while tariff-related goods inflation remains stubbornly high. The updated projections raised the Fed’s inflation forecast for 2026 and only one rate cut is now pencilled in, with seven of the nineteen officials expecting no cut at all this year.
The reaction was swift. The dollar surged, US stocks fell sharply to 2026 lows, and the Dow dropped over 600 points. The pound slipped against the dollar during the US session but has steadied this morning, while the euro found little comfort as traders braced for another long stretch of elevated US rates.
It was also a bruising day for inflation data. US producer prices for February came in well above expectations, with headline month-on-month growth more than double the consensus forecast. That reading captured pressures from before the full impact of the Middle East energy shock, meaning the worst may be yet to show up in the official numbers.
Now the focus shifts to lunchtime. The Bank of England announces at noon, where a hold at 3.75% is all but certain. It is a remarkable turnaround from just a few weeks ago, when Governor Bailey described a March cut as “a genuinely open question.” The oil price surge has shut that door firmly. What matters today is the vote split it was a razor-thin 5–4 in February – and any signal about how the committee sees the months ahead.
Minutes later, the European Central Bank will deliver its decision alongside fresh staff projections. Markets have shifted dramatically, now pricing in two quarter-point rate increases for 2026. That would have been almost unthinkable before the conflict erupted. ECB President Lagarde’s tone at the afternoon press conference could prove the single biggest mover for the euro today.
UK labour market figures released this morning added another layer to the picture. Unemployment sits at a ten-year high excluding the pandemic, earnings growth is cooling, and vacancies have dropped below pre-pandemic levels. For the Bank of England, it is the textbook definition of being caught between a rock and a hard place: a weakening economy argues for cuts, but rising energy costs demand caution.
Make sure any upcoming transactions are protected against the risks of sudden market movements. Secure a fixed exchange rate now with a forward contract; call your account manager on 020 3918 7255 to get started.
GBP: Labour market piles on the pressure
Sterling has recovered a touch against the dollar this morning after slipping in the wake of the Fed’s hawkish stance, but it faces a nervous wait ahead of the Bank of England at noon. The vote split will be the critical signal – any shift toward a more hawkish majority could offer the pound a lift, while dovish dissent may leave it vulnerable. Next week’s UK inflation data on Wednesday will then test whether energy costs are already feeding through to consumer prices.
GBP/USD past year
EUR: Lagarde holds the key
The euro has been trapped in a tug of war – supported by expectations of ECB rate hikes but weighed down by Europe’s acute vulnerability to the energy shock. This afternoon’s staff projections will reveal just how much the ECB has revised its inflation outlook upward, and Lagarde’s press conference could either validate or push back against the aggressive rate hike bets that have built up since the conflict began. Monday’s flash purchasing managers’ index (PMI) data will then show whether the German confidence collapse flagged by Tuesday’s ZEW survey is spreading to the wider economy.
GBP/EUR past year
USD: Powell draws a line in the sand
The dollar powered higher overnight after Powell made clear that rate cuts are off the table until he sees meaningful inflation progress. With US producer prices running hot and energy costs still rising, markets are now pricing in no cut until late in the year at the earliest. The dollar’s strength is a headache for anyone buying the currency, but its safe-haven appeal and the yield advantage of holding dollar assets look set to keep it supported while the Middle East uncertainty persists.
USD/GBP past year
For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business account manager on 020 3918 7255 or your Private Client account manager on 020 7898 0541.
