Currency markets began the week adjusting to a changing mix of geopolitical risk, inflation concerns and shifting interest rate expectations across major economies. Movements in sterling, the US dollar and the euro reflect how investors are reassessing policy trajectories as global uncertainty remains elevated.
Sterling entered the week on firmer footing against the euro after posting its first weekly gain in five weeks. The pound strengthened through the latter part of last week, with GBP/EUR climbing to just above 1.15, marking its strongest weekly advance since April 2025. The move reflects a notable change in how markets are pricing the outlook for Bank of England policy.
Only a week earlier, financial markets were anticipating two interest rate cuts from the Bank of England this year. That expectation has since shifted to a single reduction, a repricing that has given sterling additional support. The adjustment has been more pronounced in the UK than in the Eurozone, improving the relative interest rate outlook for the pound.
Part of this shift is tied to broader inflation concerns. Rising energy prices linked to escalating tensions in the Middle East have increased the risk that global inflation could remain elevated.
Against the dollar, sterling has faced renewed pressure. GBP/USD slipped to around 1.32 last Tuesday as demand for the US currency strengthened amid heightened geopolitical tensions. The dollar has continued to benefit from its traditional role as a safe haven during periods of global instability.
Developments in the Middle East have been a central factor supporting the dollar. Market hopes that tensions might ease diminished after US President Donald Trump stated that military operations would only end with the complete surrender of the Iranian leadership. With little indication that such conditions will be accepted, investors are increasingly preparing for the possibility that the conflict could extend further, reinforcing demand for defensive assets including the dollar.
The euro has struggled amid these developments. Early trading this week saw the single currency weaken significantly against the dollar as investors reacted to the implications of higher oil and gas prices for the Eurozone economy. The region remains particularly sensitive to energy cost increases, and the absence of a clear resolution to geopolitical tensions has weighed on sentiment.
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