🇬🇧 Sterling Under Pressure as Geopolitics and BoE Expectations Drive Markets

Last week, geopolitical tensions once again played a dominant role in driving FX markets, with the pound particularly sensitive to developments. Late in the week, headlines surrounding potential US – Iran peace talks supported a modest recovery in GBP/USD. However, despite this rebound, cable remains on the back foot amid ongoing uncertainty, with the Pound still posting an overall weekly decline after touching lows of 1.345. It begins this week slightly firmer, opening around 1.353.

Looking at GBP/EUR, which opens just above 1.15, attention now turns to a key domestic event, the Bank of England’s upcoming interest rate decision. The Monetary Policy Committee is widely expected to leave rates unchanged, however, the key risk lies in how the Bank responds to market expectations, which are currently pricing in at least two rate hikes before year-end. If the Bank pushes back against these expectations, signalling a less hawkish stance, the Pound could come under renewed pressure.

🇺🇸 Dollar Firms as Iran Talks Falter

Heading into the weekend, reports emerged that Iran’s Foreign Minister, Abbas Araghchi, was in Pakistan ahead of a planned second round of US–Iran peace talks. However, with negotiations once again stalling, oil prices moved higher. Brent crude rose by nearly 2%, while US crude gained around 1%. The lack of progress is likely to offer near-term support to the US Dollar. Last week proved frustrating for markets, dominated by geopolitical uncertainty and a clear absence of meaningful progress towards a resolution. Looking ahead, while geopolitical tensions remain a key driver, domestic factors will also come into focus. Earnings from major US companies such as Amazon and Apple are expected to drive headlines, with strong results potentially providing additional support for the dollar.

🇪🇺 Euro Strengthens as Outlook for Pound Softens

The Euro starts the week on the front foot, gaining ground against both the US Dollar and the Pound. EUR/USD is up over 0.2% on Monday morning, building on last week’s relatively flat performance and pushing further into the 1.17 range. In EUR/GBP, the broader outlook is beginning to shift. Investment bank consensus forecasts increasingly point to gradual Pound weakness, with current levels seen as slightly overvalued. This view is largely driven by the potential of a narrowing interest rate differential with the Eurozone. While short-term moves remain data and event dependent, the overall bias for GBP/EUR is tilted to the downside. That said, much will hinge on this week’s Bank of England decision, which could either reinforce or challenge this prevailing narrative.

Currency In Focus

This week’s currency in focus is the Canadian dollar (CAD), particularly how ongoing geopolitical tensions are impacting its performance. Despite the rise in oil prices, typically a supportive factor, CAD has failed to benefit with market sentiment turning increasingly bearish. A key takeaway is that domestic fundamentals are weighing on the currency. Slowing economic growth, alongside soft housing and labour markets, continues to put pressure on the outlook. In addition, lingering business uncertainty is limiting momentum. From a monetary policy perspective, the Bank of Canada is expected to remain on hold this year, which further constrains the currency. As a result,  CAD is at a disadvantage against currencies backed by central banks that are still maintaining tighter or more hawkish policy stance.

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