Market Overview: The British pound is experiencing significant volatility amid renewed inflationary pressures and turmoil in the bond market. These developments are increasing expectations that the Bank of England may be forced to implement more aggressive interest rate hikes.
Key Developments: 1. UK Prime Minister Holds Emergency Meeting Amid Economic Impact of Iran Conflict UK Prime Minister Keir Starmer convened an urgent national meeting on Monday to address the economic repercussions of escalating tensions with Iran. Concurrently, UK government borrowing costs have surged to their highest levels since the 2008 global financial crisis.
Iran recently stated it would target energy and water systems in neighboring Gulf countries if US President Donald Trump follows through on threats to attack Iran's power grid. These comments have further destabilized financial markets.
Given the UK's heavy reliance on imported natural gas, combined with persistently high inflation and strained public finances, UK government bonds have underperformed compared to other major economies.
Starmer told reporters, "I have requested a discussion of all available government measures to address cost-of-living pressures during the cabinet emergency meeting." The Treasury indicated the meeting would also cover energy security, industrial resilience, and supply chain issues.
Chancellor Rachel Reeves stated it is too early to assess the full economic impact of the conflict. She rejected calls for broad-based cost-of-living subsidies but confirmed targeted support measures are under consideration.
Housing Minister Matthew Pennycook told the BBC that responses include cracking down on "potential profiteering by fuel retailers." The fuel industry has denied such practices exist.
2. Trump's Delayed Strike Announcement Boosts US Stocks; Iran Denies Communication On Monday, US President Donald Trump announced he had ordered a five-day delay in military strikes against Iranian power plants and energy infrastructure following what he described as "productive dialogue" with Tehran. This news prompted broad gains in major Wall Street indices.
However, Iran's Fars News Agency cited sources denying Trump's claims, stating Iran has not engaged in direct or indirect communication with the US. Meanwhile, the Israeli military confirmed ongoing airstrikes against Iranian targets.
Following Trump's remarks, global markets rallied strongly, with the European STOXX 600 index also advancing. Precious metals edged higher while oil prices declined, reflecting improved risk appetite. Previously, both gold and oil had fallen due to threats of attacks on Israeli and Iranian power grids.
Chris Larkin, Managing Director of Trading and Investing at E*TRADE from Morgan Stanley, commented, "Markets received some potential positive news from the Middle East on Monday. However, the sustainability of any rebound likely depends on substantive geopolitical progress. We remain in a headline-driven market environment, with light economic data this week keeping focus on oil prices and political developments."
After Trump's statements, investors reduced bets on Federal Reserve rate hikes. CME Group's FedWatch tool showed market expectations for a December rate hike fell to 24%, down from over 50% previously. Last week, the Fed signaled a hawkish stance, projecting higher inflation and planning only one rate cut this year, leading markets to scale back expectations for 2026 policy easing.
3. Fed Official Milan Urges Gradual Rate Cuts Despite Oil Price Uncertainty Federal Reserve Governor Stephen Milan stated on Monday that it is premature to determine how surging oil prices will affect the US economy. He maintained that a weak labor market necessitates further interest rate cuts by the central bank.
In an interview with Bloomberg Television, Milan said, "We should wait for all information to come in before altering our expectations significantly." Regarding the sharp rise in energy prices, he noted, "I think it's too early to have a clear view of the next 12 months," which is the key focus for monetary policymakers. Milan emphasized that conventional practice dictates ignoring temporary oil price shocks, so his policy outlook remains unchanged, favoring gradual rate reductions.
Discussing last week's Fed meeting and updated projections, Milan revealed he had revised his expectation for six rate cuts this year down to four, while raising his inflation estimates. The Federal Open Market Committee kept the target interest rate range unchanged at 3.5%-3.75%, with most officials projecting one rate cut this year. The economic outlook faces uncertainty due to President Trump's conflict with Iran, as soaring energy prices could either push inflation—already above the Fed's 2% target—higher or suppress demand.
Milan was the sole dissenting voter favoring a rate cut at the meeting. Having previously served as a Fed governor before leaving to advise the Trump White House and then returning, he has consistently advocated for significant rate cuts—a position supported by Trump but opposed by current Fed officials. He stated, "I believe the labor market still requires additional monetary policy support, which is why I dissented at the last meeting."
Milan pointed out that while inflation risks have become more concerning, unemployment risks have also increased, as negative oil supply shocks simultaneously act as demand shocks. He said the key monitorable is whether rising oil prices boost inflation expectations and wages, but neither has occurred yet. Meanwhile, some Fed officials are considering whether future rate hikes might be necessary if oil shocks lead to significantly higher inflation.
Market Data and Technical Analysis: On Tuesday, March 24, global financial markets will face a series of PMI data releases. At 17:30 GMT, the UK will release preliminary March manufacturing and services PMI data, a key focus during European hours. At 21:45 GMT, US March S&P Global manufacturing and services PMI figures will be published, influencing market perceptions of Fed policy and economic prospects.
Amid Middle East tensions, UK financial markets experienced sharp swings. On Monday, President Trump's announcement delaying planned strikes on Iranian power plants for five days quickly eased risk aversion. GBP/USD rose 0.59% to 1.342, reversing an earlier decline of over 0.5% as investors had flocked to the US dollar. The 10-year UK government bond yield fell 7 basis points to 4.928%, after earlier surging to its highest level since the 2008 financial crisis on heightened rate hike expectations.
Expectations for the Bank of England's rate path have reversed dramatically. Traders now price in approximately 60 basis points of rate hikes by 2026—a fundamental shift from pre-conflict expectations of two rate cuts—though this has moderated from intraday highs.
In energy markets, Brent crude fell about 8% to $103.60 per barrel, temporarily easing pressure on the UK as a major energy importer. However, energy prices remain more than 40% above pre-conflict levels, with persistent inflation risks raising concerns that the UK economy could face stagflation—weak growth alongside high inflation.
Against this backdrop, Prime Minister Keir Starmer convened an emergency meeting with senior ministers and Bank of England Governor Andrew Bailey to discuss responses to energy shocks. Markets widely view the UK bond market as undergoing its most severe stress test since the 2022 "mini-budget crisis." Three key risks—energy-driven inflation persistence, forced aggressive monetary tightening, and deteriorating public finances under subsidy pressures—have collectively raised risk premiums on UK assets. Future trends will heavily depend on Middle East developments and inflation data.
Political and Geopolitical Context: Prime Minister Keir Starmer chaired a national emergency meeting (codenamed "Cobra") on Monday to address the dual economic and security impacts of escalating Iran conflict. Starmer clarified after the meeting that ongoing assessments show no evidence the UK mainland is a direct target for Iran. This statement responded to weekend reports of Iranian missile launches toward the Diego Garcia UK-US military base. He emphasized that any attempt to reopen the Strait of Hormuz requires careful planning, with the immediate priority being protecting UK interests and de-escalating regional tensions.
The emergency meeting included Chancellor Rachel Reeves, the Foreign Secretary, Energy Secretary, and BOE Governor Andrew Bailey, focusing on cost of living, energy security, and supply chain resilience. Starmer stated the government will use all available tools to address民生 pressures from rising energy prices. Chancellor Reeves said it is too early to judge the conflict's full economic impact, ruling out broad cost-of-living subsidies in favor of targeted support. Housing Minister Matthew Pennycook proposed cracking down on fuel retailer profiteering, which the industry denies.
The emergency meeting coincided with intense financial market volatility. The 10-year gilt yield briefly exceeded 5%, hitting a new high since the 2008 global financial crisis. Market expectations for BOE rates have shifted rapidly from pre-conflict rate cuts to nearly four hikes this year. Energy price shocks are projected to push inflation toward 5%, further slowing economic growth and increasing pressure on Reeves' efforts to repair public finances. The government last week announced a £53 million aid package for households using fuel heating, but bond market unease over expanding fiscal pressures continues to grow.
Financial Market Impact: Following President Trump's announcement pausing military strikes on Iranian power plants, the UK FTSE 100 index fell up to 2.4% intraday before closing 0.2% lower, near three-month lows. Sharp declines in oil prices dragged down oil majors BP and Shell, which fell 2.2% and 4.2% respectively, leading the index lower. Engineering company Goodwin considered cutting dividends due to Middle East order delays, with its shares nearly halving.
The UK 10-year gilt yield reached 5.118% intraday, its highest since July 2008, before stabilizing around 5%. Market expectations for BOE rate hikes this year moderated from four to about three. Prime Minister Starmer's emergency meeting addressed the conflict's economic impact, with the Chancellor and BOE Governor in attendance. Starmer stated the UK must prepare for a potentially prolonged conflict but expressed no "substantive concerns" over energy supply. Precious metal mining stocks rallied with gold prices, while gambling firm Entain gained 8.2% on US legislative news.
Geopolitical Negotiations and Military Actions: US-Iran negotiations show signs of progress as Trump delays strikes on Iranian power plants. On March 23, President Trump announced the US had held talks with Iran reaching "significant understanding," leading to a five-day delay in planned military strikes. He stated talks led by his envoy Witkoff and son-in-law Kushner could soon yield an agreement if progress continues. This news boosted global equities, with Brent crude briefly falling below $100 per barrel.
However, Iranian Parliament Speaker Kalibaf denied any talks with the US, calling reports "fake news" and market manipulation. Iran's Revolutionary Guard warned of attacks on US targets in the Middle East, labeling Trump's comments "psychological warfare." Despite conflicting official statements, sources indicated indirect talks mediated by countries including Pakistan could begin this week in Islamabad.
Operation Epic Fury Details: Netanyahu Advocated Assassinating Khamenei. The conflict originated from "Operation Epic Fury," a joint US-Israel initiative launched on February 28. Reuters reported that 48 hours prior, Israeli Prime Minister Netanyahu called Trump, urging a "decapitation strike" based on intelligence indicating a narrowed window during a meeting of Iran's Supreme Leader Khamenei. Netanyahu argued this would both retaliate for earlier Iranian plots to assassinate Trump and present a historic opportunity to overthrow Iran's theocratic regime.
Trump ultimately approved the proposal. The February 28 attack killed Khamenei, with his son Mojtaba succeeding him. Subsequent US strikes targeted Iranian nuclear and missile facilities, while Iran blockaded the Strait of Hormuz and retaliated, resulting over 2,000 deaths including 13 US troops and causing significant global energy market disruption.
Lebanon Front Escalates; Israeli Official Suggests Territory Annexation. On the same day, Israeli Finance Minister Smotrich publicly stated Israel should extend its border with Lebanon to the Litani River, the clearest territorial expansion statement by Israeli officials during the Lebanon conflict. Since Hezbollah's missile attacks on Israel on March 2, the Israeli military has conducted intense airstrikes and ground operations in southern Lebanon, causing over 1,000 deaths, displacing one million people, and destroying key bridges linking north and south. These actions prompted strong reactions from Lebanon, intensifying international law and humanitarian concerns.
Technical Analysis and GBP/USD Outlook: Short-term GBP/USD price action is expected to fluctuate within the 1.3460-1.3340 range.
Technical indicators summary: On Monday, President Trump's announcement of productive US-Iran dialogue and delayed military strikes caused a sharp pullback in the US dollar index, driving a rapid GBP rebound. The pound rallied over 200 pips from its intraday low of 1.3255 to a high of 1.3478. Simultaneously, market expectations for the BOE's rate path reversed dramatically—from two 2026 rate cuts priced previously to four 25-basis-point hikes fully priced in for this year. This pushed the 10-year UK government bond yield to 5.068%, its highest since July 2008, enhancing sterling's short-term appeal.
Energy price shocks continue boosting UK inflation pressures. Some economists project UK inflation could reach 5% later this year, further slowing an already weak economy. Meanwhile, upside inflation risks challenge Chancellor Reeves' efforts to repair public finances. Last week's £53 million aid package for households using fuel heating hasn't alleviated broader market concerns about fiscal support, heightening bond investor unease.
Notably, while bond market losses were initially concentrated in short-term gilts highly sensitive to rate expectations, long-term gilt yields have also surged recently. Market expectations for the BOE's next move have shifted abruptly from cuts to hikes, with nearly four 25-bp hikes fully priced by Monday. Last week, the BOE stated readiness to act to maintain inflation around its 2% target, with some policymakers suggesting higher borrowing costs may be needed, though Governor Bailey cautiously noted it's too early to conclude rate increases are necessary.
Jan Foley, Senior FX Strategist at Rabobank, highlighted that beyond rising inflation, expectations for government fiscal support measures in response to energy price increases are pressuring UK gilts. She warned sterling could face significant pressure if speculative funds or foreign investors trigger sharp gilt selling.
Although the 10-year gilt yield retreated to 4.928% (down 7 bps) after hitting a 2008 high, expectations for four hikes this year haven't fully dissipated. Traders price in about 60 bps of cumulative BOE hikes by 2026—a major shift from pre-conflict expectations of two cuts, though moderated from Monday's early pricing. EUR/GBP fell 0.3% to 86.48 pence, reflecting views that the BOE will hike more than the ECB this year, supporting sterling's relative appeal.
Geopolitically, Trump stated on social media that US-Iran talks on resolving Middle East hostilities were "productive," but Iran's Fars News Agency denied any direct or indirect communication. Ipek Ozkardeskaya, Senior Analyst at Swissquote, noted US efforts to ease tensions require Iranian cooperation to be effective, making Iran's response more critical than Trump's unilateral statements, with hope remaining but uncertainty still significant.
Brent crude's approximately 8% decline somewhat eased pressure on the UK's energy-import-dependent economy. However, with energy prices still over 40% above pre-conflict levels, concerns about UK economic slowdown and sharp inflation persist, weighing on sterling and impacting bond markets. Prime Minister Starmer has convened senior ministers and BOE Governor Bailey for emergency meetings discussing responses to war-induced energy shocks.
Looking at GBP outlook, Oliver Faizallah, Analyst at Charles Stanley, noted in a report that ongoing Middle East tensions limiting energy supplies maintain UK inflation risks; however, due to weak economic growth, the BOE is unlikely to pursue aggressive rate hikes despite high inflation pressures. The firm expects the BOE to hold rates at 3.75% in coming months. LSEG data shows investors now fully price two 2026 rate hikes.
In summary, short-term sterling movements will remain influenced by the interplay of geopolitical developments, energy prices, and rate expectations. If US-Iran tensions ease further and energy prices continue declining, GBP may find breathing room; however, if persistent inflation forces the BOE to signal clearer rate hikes, bond market volatility could tighten financial conditions, pressuring the pound. With current market pricing already reflecting significant hike expectations, further GBP upside may be limited. Subsequent trends will depend more on whether inflation data validates market views and the coordination between fiscal policy and central bank actions.
From a 4-hour chart technical perspective, although GBP/USD briefly fell into the relatively weak zone between the Bollinger Band middle and lower bands intraday yesterday, its strong rally ultimately returned it to the stronger area between the middle and upper bands, indicating a substantial shift in bullish-bearish momentum. Meanwhile, the slight expansion in the Bollinger Band width reflects increased short-term market volatility; if the bands widen further with the exchange rate sustaining near the upper band, upward momentum could strengthen. Specifically, the upper band gradually rises toward the 1.3460 area, forming dynamic near-term resistance; the middle band holds steady around 1.3350, a key level for determining short-term trend direction and strength; the lower band points to the 1.3230 area, providing dynamic near-term support. Momentum indicators show the 14-period RSI has rebounded into the 50-60 relatively strong range, suggesting accumulating bullish momentum and a shift from cautious to positive market sentiment.
From a 4-hour chart trend structure perspective, GBP/USD remains in a phased consolidation pattern overall, with no clear unilateral short-term trend established yet, as markets await further signals. Immediate resistance lies near 1.3460; if bulls push the exchange rate firmly above this level, upward momentum could strengthen, testing the 1.3540 area. Notably, 1.3540 also represents the 50% Fibonacci retracement level of the decline from the periodic high of 1.3867 to the low of 1.3217, carrying significant technical resistance. A decisive break above this level could open further upside, shifting the trend bullish. Conversely, if the exchange rate falls back and breaks below the 1.3340 support area, the short-term structure would weaken again, with bearish targets extending toward 1.3250 or lower.
Short-term GBP/USD price path reference: Upside: 1.3460-1.3540 Downside: 1.3340-1.3250
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