Bank of England Deputy Governor Sarah Breeden warned on Friday that the conflict in the Middle East has increased the risk of multiple financial stresses hitting markets at the same time, raising the prospect of a sharp rise in volatility and uncertainty.
Speaking at an event in the United States, Breeden said that vulnerabilities seen before earlier episodes of market turmoil have re-emerged, particularly in private and government bond markets, where valuation pressures remain elevated.
Structural vulnerabilities remain in global finance
Breeden highlighted that core weaknesses such as leverage, complexity and opacity are still embedded in the global financial system.
She cautioned that if several points of stress were to materialize together, the impact could be amplified across markets and sectors, affecting a wide range of borrowers simultaneously.
According to her, risks have shifted away from the more heavily regulated and better-capitalized banking sector into less transparent areas of market-based finance, which now account for around half of global financial assets.
Limited reaction in pound as markets await clarity
Following Breeden’s comments, the pound showed only a muted response in Friday’s European session, trading in a narrow range around 1.3530 against the US dollar.
Market participants kept positions largely unchanged, waiting for further developments on both the geopolitical front and macroeconomic data before making larger directional bets.
Bond market stress and risk appetite
Breeden’s warning comes as government bond markets face ongoing strain. Rising volatility in sovereign debt has been reducing appetite for risk, making non-yielding and speculative assets less attractive.
As yields and price swings increase, capital has tended to rotate toward perceived safe havens such as government bonds, and away from higher-risk positions.
Digital asset markets under pressure
The shift in risk sentiment has already been visible in digital asset markets. In the first quarter of 2026, total digital asset capitalization fell 20.4% to $2.4 trillion.
Bitcoin slipped modestly on 17 April, trading around $74,851, as traders reacted to developments in the Middle East and reassessed exposure to high-volatility assets.
Despite this pressure, some alternative assets have shown an ability to rebound more quickly than equities after geopolitical headlines. Short rallies of 4–7% have followed news suggesting de-escalation, underlining how sensitive these markets are to changes in global sentiment.
Bank of England’s policy framework and inflation outlook
The Bank of England targets an inflation rate of 2% and uses its base lending rate as its main policy tool. Changes to this rate feed through to borrowing costs across the economy and influence the pound’s value.
When inflation is above target, the central bank generally raises interest rates to cool demand for credit, a move that can support the currency. When inflation weakens, it may cut rates to spur borrowing and growth, often putting downward pressure on the pound.
In exceptional circumstances, the bank can turn to quantitative easing, purchasing large volumes of assets such as government bonds to add liquidity to the financial system. When inflation is elevated and growth is solid, it can reverse this through quantitative tightening, reducing bond holdings and credit supply, a stance that typically underpins the currency.
Policy on hold as price pressures stay elevated
Against this backdrop, the United Kingdom’s inflation rate remained at 3% in February, well above the 2% target. Policymakers expect inflation to stay in a 3–3.5% range over the next two quarters.
In March, the Monetary Policy Committee kept its key interest rate unchanged at 3.75%, opting for a cautious approach while it assesses the impact of higher energy costs and global tensions on domestic activity and prices.
Traders focus on capital protection and fast-moving markets
With geopolitical risks elevated and inflation still above target, traders have been prioritizing capital preservation. Liquidity is being held back and large risk-on positions are being scaled down, especially in more speculative corners of the market.
Automated trading systems are reacting at high speed to headlines and data releases, amplifying short-term price swings across digital and other markets. This has contributed to sharp, but often brief, bursts of volatility as markets respond to each new piece of information on the conflict and the global economic outlook.
Worried about volatility from central bank warnings? Learn how forex trading helps you navigate macro-driven market shocks.
Disclaimer: The content on this page is provided for general informational purposes only and does not represent the views or financial advice of Toobit. We make no guarantees regarding the accuracy or completeness of this information and shall not be held liable for any errors, omissions, or outcomes resulting from its use. Investing in digital assets involves risk; users should independently evaluate their financial situation and the risks involved. For further details, please consult our Terms of Service and Risk Disclosure.
