Pound Drops Below 1.15 vs. Euro as War Trades Unwind

File image of Donald Trump. Source: White House / Official White House Photo by Daniel Torok.

Markets react to unconfirmed reports that Iran's president said the country was ready to end the war, assuming some guarantees were put into place.

An unwind of war trades saw Pound sterling drop against the euro but rise against the dollar.

Pound-euro fell below 1.15 to reach 1.1470 late Wednesday, down from 1.1535 on Monday, taking all-in money transfer rates to approximately 1.1440 and high street bank rates to around 1.1350. (View latest retail rates update).

Pound-dollar rises to 1.3328 while euro-dollar gains to 1.1616.

These adjustments follow a fall in oil prices following unconfirmed reports that Iran's president said the country was ready to end the war, assuming some guarantees were put into place.

Also, U.S. President Donald Trump will address the nation at 9 pm Washington time on Wednesday with "an important update on Iran."

Earlier, he suggested in remarks to reporters that the conflict could end in two to three weeks. The pound had risen steadily against the euro through March and hopes that the war will end see some of those gains unwind.

If the full extent of the war premium unwinds, sterling-euro could be looking at a decline to 1.14, which is where it was prior to hostilities starting. Those with upcoming euro payments may want to secure today's rate or set a rate order before any further shift.

The dollar was the biggest winner of the war, and it is therefore at risk of a bigger unwind over the coming days should hopes for a ceasefire continue to grow.

"The dollar has clearly established its status as the premier safe-haven currency during geopolitical stress and supply shocks," says a note from Bank of New York.

BNY notes in a new research note that the euro proved particularly vulnerable during this time. "What is surprising during the recent unwinding process, however, is that the burden of adjustment has disproportionately fallen on EURUSD."

This means that the euro-dollar stands to outperform in the rebound that would come in the wake of building ceasefire hopes.

If EUR/USD is rising faster than GBP/USD, then GBP/EUR would automatically fall, which is why we think the exchange rate has come under pressure over recent days.

What This Means for Your GBP Payment

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Newsflow through Wednesday continues to build a picture of a U.S. President who is becoming bored with his foray in the Middle East and is ready to move on to his next project.

The pivot would be in keeping with the traditional geopolitical playbook, where energy spikes tend to be short-lived and relatively sanguine for markets over a longer-term horizon.

"The situation in the Middle East remains fluid. A prolonged energy shock would raise the risk of stagflation. However, our current baseline scenario assumes that energy prices will follow the typical pattern observed during geopolitical events: a sharp but short-lived spike that does not cause substantial economic damage," says a research update note from Julius Baer.

Risks remain, though: a U.S. abandonment could prove risky as Gulf states would be left exposed to a more aggressive Iran, which has stated it is ready to fully control the Strait of Hormuz and operate a toll system for shipping. Where does that leave the UAE and Saudi Arabia?

"The UAE is seeking to use force to re‑open the Strait. In our view, we think there is further pain still to go (at the very least in oil, and rates by association, even if US involvement ends), given most of the concessions will be on the US side, especially the ceding of the Strait to an irate Iran," says Michael Tang, an analyst at Commonwealth Bank.

There should be enough of a risk premium to underpin the dollar in the near-term, even if the upside risks have lessened notably.