Secretary of War Hegseth and President Trump. Image: United States government work.
The British pound holds advances made against the euro and dollar in response to news the U.S. and Iran agreed to strike a two-week ceasefire.
U.S. President Donald Trump says a two-week ceasefire between the U.S. and Iran will come into effect if shipping is allowed to move through the Strait of Hormuz. Iranian Foreign Minister Abbas Araghchi says Tehran will agree to the end in fighting "if attacks against Iran are halted".
Iran allowed tankers through the Strait of Hormuz earlier Wednesday, but as the day wore on, markets showed some nerves as it became apparent that hostilities were continuing.
"It is a good sign to see markets holding onto their gains despite some reports of violation of the ceasefire with Israel continuing to bombard Lebanon which, in turn, has trigged Iran to stop the passage of oil tankers via Hormuz strait according to some reports," says Fawad Razaqzada, an analyst at Forex.com.
For markets, that a ceasefire emerged at all is a best-case outcome as it means a significant escalation was avoided; Trump had said he would bomb Iran "back into the stone age" if his 1 AM BST deadline for Tehran to yield was not met.
With a two-week ceasefire in prospect, oil prices fell, the dollar dropped, and stocks rose. Pound sterling benefited via improved investor sentiment: the pound-dollar conversion trades a per cent higher at 1.3430, pound-euro trades higher by a quarter of a per cent at 1.1490.
By the London close, sterling was seen off its highs and those with impending transfers should consider benchmarking their bank transfer costs against more competitive provider channels: our co-branded GBP/EUR tool is here and GBP/USD tool is here.
Above: GBP/EUR rises on improved global sentiment.
Another welcome development for markets is that they've avoided a situation where Trump pushes back his Tuesday night deadline on the pretext that there was some progress, ultimately ensuring the status quo of recent weeks continues.
Under such a scenario, markets would have muddled along, which for sterling sellers, meant a grind lower in valuations.
Breakthrough
- This deal is the result of diplomatic efforts that were ultimately screened by Trump's total annihilation rhetoric.
- By Monday night Pakistani mediators had U.S. approval for an updated proposal for a two-week ceasefire, Axios reports, and according to the report it was up to Iran's new supreme leader, Mojtaba Khamenei, to decide.
- Apparently he's been active in negotiations for two days: the involvement of the new supreme leader was clandestine and laborious, and facing an active threat of assassination by Israel, Khamenei has been communicating primarily via runners passing notes.
- Axios cites two sources who said Khamenei giving the negotiators his blessing to cut a deal was the breakthrough.
- Without his green light, there wouldn't have been a deal, the regional source said.
The pound tends to benefit when the mood music improves, and falling oil and gas prices will surely aid the domestic economy.
De-escalation allows market participants to row back on bets that the Bank of England will respond to rising inflation risks with interest rate hikes.
"Pricing in of rate hikes went too far in the escalation phase of the conflict, so some continued reversion back lower in expectations seems warranted on news of the ceasefire," says a daily note from Lloyds Bank.
Above: GBP/USD jumps.
That's welcome news for borrowers, but for the pound, the risks are murkier: often when that happens, pound sterling can come under pressure.
So that's something we'll be watching for in the coming days.
For now, the relief rally is in charge, and that's taking the local unit up a notch.
Above: Brent crude prices plummet.
Despite the helpful headlines midweek, market analysts at Lloyds Bank say there are expected to be lasting financial market impacts.
"Even if shipping resumes through the Strait of Hormuz, with damage sustained to some regional energy infrastructure, supply constraints could be an issue for some time," says Lloyds in a morning briefing.
Looking at the UK natural gas price outlook, futures data shows elevated levels can be expected for almost a year.
That locks in higher inflation baselines for months to come. How the pound responds will depend on whether that higher inflation baseline threatens the UK economy and government finances.
If the situation is uncomfortable but ultimately navigatable, sterling would benefit from higher bond yields. If government finances are compromised, a bond market rout becomes a real prospect, and that's a worst-case scenario for the pound.