The British Pound strengthened after U.S. President Donald Trump announced that a ceasefire between Israel and Iran “is now in effect.” This marks a major easing of tensions in a conflict that could have quickly escalated after U.S. strikes on Iranian nuclear sites. These strikes raised concerns that Iran might close the vital Gulf of Hormuz in retaliation.
A ceasefire deadline of 5 a.m. BST today has improved investor confidence. As a result, oil prices have dropped, and the U.S. Dollar has weakened. The Pound to Dollar exchange rate (GBP/USD) rose to 1.3564, up from a low of 1.3371 yesterday.
Stock markets in Asia are trading higher, with Europe and the U.S. expected to follow. This reduced market volatility has also helped the Pound gain against the Euro. The Pound to Euro exchange rate (GBP/EUR) increased from 1.1642 to 1.1687.
Currencies sensitive to overall market sentiment, such as the Australian and New Zealand Dollars, are leading the gains.
Yesterday, Iran attacked a U.S. military base in Qatar in response to the recent U.S. strikes on its nuclear facilities. The base had been evacuated earlier, which made the attack appear symbolic and low risk. This gave investors confidence that Iran might step back from further escalation.
“Iran had threatened to block the Strait of Hormuz, a key route for oil and gas transport worldwide,” said Elisabet Kopelman, U.S. economist at SEB. “But since Iran avoided energy-related targets, oil prices fell and stock markets rose.”
She added that the market currently assumes either a ceasefire or at least a reduced risk of prolonged conflict.
If tensions continue to ease, the GBP/EUR rate could recover further. However, gains may be limited by the UK’s slowing economy and rising chances that the Bank of England will speed up interest rate cuts.
The GBP/USD rate has more room to rise, as it is influenced mainly by factors in the U.S., where the dollar has been weakening for several months.
Meanwhile, the Pound may weaken against the Australian, New Zealand, and Canadian Dollars (GBP/AUD, GBP/NZD, GBP/CAD). These currencies could rebound after losing value during the recent tensions.
