The pound endured a challenging week as the escalating Iran conflict triggered a flight to safety, with the dollar benefiting from its safe-haven status and the US's position as the world's top oil producer. Sterling was headed for a 1% loss over the course of the week as all G10 currencies retreated against the greenback. UK economic data added to the pressure, with January GDP unexpectedly stalling and raising questions about the economy's resilience heading into the energy price shock.
*Daily move - against G10 rates as of 17:00 GMT, 15.03.26
** Indicative rates - interbank rates as of 17:00 GMT, 15.03.26
The week ahead promises to be pivotal for FX markets as four major central banks - the European Central Bank, Bank of England, Swiss National Bank, announce policy decisions on Thursday against a backdrop of heightened volatility triggered by the energy price shock. The Federal Reserve will also decide on Wednesday, though the dollar is expected to remain driven primarily by the Middle East crisis rather than monetary policy signals. BofA now expects the Bank of England to hold rates at 3.75% rather than cut, as policymakers enter "wait and see mode" to assess the duration and scale of the energy price disruption.
Sterling faces conflicting pressures in the coming days. While rising energy prices have prompted markets to price in the possibility of BOE rate hikes by June, a dramatic shift from expectations of two rate cuts just weeks ago, the UK economy remains fragile with stagnant growth. Strategists at Standard Chartered see the pound continuing to underperform in the coming weeks as the war weighs on energy-importing nations.
Key catalysts: Thursday's central bank decisions will be critical, with traders seeking clarity on how policymakers balance inflation risks against growth concerns. UK job market figures due next week will also be crucial for the BOE as it calibrates its response. Any signs of conflict de-escalation could trigger sharp reversals in positioning, as investor conviction remains low in these volatile markets.
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