The British pound weakened against the US dollar in early European trade on Friday, with GBP/USD trading near 1.3520. The move lower came as global markets shifted focus to possible negotiations between Washington and Tehran, expected to resume over the weekend, and to the broader impact of geopolitical tensions on risk appetite.
Strong UK data overshadowed by conflict risks
Fresh data from the Office for National Statistics showed the UK economy grew 0.5% month-on-month in February, beating expectations for a 0.1% rise. The figures highlighted underlying economic strength ahead of the recent conflict, but market participants are now reassessing that performance as the full impact of the surge in violence and the resulting energy shock filters through.
The earlier 0.5% print is seen as backward-looking, reflecting conditions before the disruption to trade, supply chains, and energy markets. The outlook for the coming months is more uncertain, with concerns that higher energy costs could curb growth while keeping inflation elevated.
Bank of England signals caution on rate moves
Bank of England Governor Andrew Bailey said global markets were facing an energy shock and stressed that the central bank would take time before considering any change in interest rates. His comments underline a cautious stance as policymakers weigh persistent inflation pressures against fragile growth.
Earlier this week, the International Monetary Fund urged the Bank not to tighten policy too quickly given the geopolitical backdrop. Together, these signals have led markets to pare back expectations for rate increases in 2026.
Analysts now widely expect the Bank’s benchmark rate to remain at 3.75% for the rest of the year, raising concerns over a potential stagflation scenario in which the Bank is constrained from raising rates despite energy-driven inflation, for fear of derailing an already fragile recovery.
US–Iran talks dominate near-term dollar direction
In the United States, President Donald Trump said his administration and Iranian officials were “very close” to a deal, with talks potentially restarting within days. His comments came after the implementation of a 10-day ceasefire between Israel and Lebanon, which has helped ease immediate regional tensions.
A second round of US–Iran talks could take place this weekend, ahead of a temporary ceasefire deadline on April 21. While some progress has been reported, significant divisions remain, particularly over Iran’s uranium enrichment program. Washington is said to be seeking a 20-year suspension, while Tehran has reportedly countered with a five-year limit.
This creates a binary setup for global markets.
- A lasting agreement would likely reduce demand for the US dollar as a safe-haven asset, weigh on the currency, and support risk-sensitive markets and currencies such as the pound.
- A breakdown in talks or a return to hostilities would be expected to trigger a flight to safety, strengthen the dollar, and pressure risk assets, including GBP/USD.
With the pound’s immediate direction seen as more closely tied to swings in broader risk sentiment than to domestic data, traders are watching headlines around the ceasefire deadline and any official statements from negotiators closely.
Role of the pound in global currency markets
The pound sterling, the UK’s official currency since 886 AD, accounts for around 12% of daily global foreign exchange turnover, averaging about $630 billion according to 2022 data.
Key trading pairs include:
- GBP/USD (“Cable”), representing about 11% of global FX volume
- GBP/JPY, accounting for roughly 3%
- EUR/GBP, at about 2%
Given this scale, abrupt shifts in global risk appetite and dollar demand can have a pronounced impact on sterling crosses, particularly GBP/USD.
Monetary policy remains the primary domestic driver
Despite the current focus on geopolitics, Bank of England policy remains the central domestic driver for the pound over the medium term. The Bank’s rate decisions are aimed at anchoring inflation around its 2% target.
In general:
- Higher interest rates tend to support the pound by raising returns on sterling-denominated assets.
- Lower rates can weaken the currency by reducing those returns and dampening capital inflows.
Key economic indicators—such as GDP growth, purchasing managers’ indices, and labour market data—feed into expectations for future Bank of England actions. Strong releases typically underpin the pound, while weaker data can weigh on it.
Trade balance and structural factors
The UK’s trade position also influences sterling’s trend.
- A trade surplus, where exports exceed imports, tends to support the pound by boosting demand for UK goods and services.
- A trade deficit has the opposite effect, as it implies higher demand for foreign currencies.
With the UK facing the dual challenges of an energy shock and geopolitical uncertainty, the supportive impact of February’s strong GDP print is being tempered by concerns over growth, inflation, and the global risk environment.
For now, the pound’s near-term path remains entwined with developments in US–Iran negotiations and the broader shift between “risk-on” and “risk-off” sentiment rather than with domestic data alone. Traders are likely to stay focused on ceasefire deadlines and diplomatic signals as key catalysts for moves in GBP/USD.
Want to see how macro news can move crypto too? Explore our guide on interest rates and Bitcoin next.
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