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Tensions on the rise again in the Middle East, putting pound sterling on the backfoot this Monday.
On Friday we signed off with the good news that Iran had agreed to open the Strait of Hormuz, reporting that the pound was trading higher against the dollar and euro as a result.
But, we walk into the new week reporting a notable deterioration in the Middle East, as the Strait remains closed and the U.S. and Iran are unlikely to engage each other in a second round of negotiations.
On Monday, the leading headline is the U.S. had seized an Iranian-flagged tanker in the Strait after it failed to adhere to a U.S. blockade. Iran responded by saying it would pull out of talks that were due in Pakistan later today.
"We’re offering a very fair and reasonable DEAL, and I hope they take it because, if they don’t, the United States is going to knock out every single Power Plant, and every single Bridge, in Iran. NO MORE MR. NICE GUY!" said U.S. President Donald Trump in an overnight message.
Hallmarks of escalation are evident in GBP rates on Monday: Pound-dollar gaps lower to 1.3490, having been as high as 1.36 on Friday. Pound-euro falls to 1.1480, confirmation that pound sterling is on offer amidst soft investor sentiment.
Further losses for the pound against the euro and dollar are likely in the coming days if the situation escalates further.
However, the market response to this deterioration is still relatively minor and certainly betrays ongoing market optimism over the matter.
"Any wobble could be short-lived and an opportunity to re-establish dollar shorts," says a weekly FX note from Barclays.
Insane footage of a US ?? Navy destroyer, USS Spruance, firing into a cargo ship’s engine room off the coast of Iran after repeated warnings to turn back pic.twitter.com/6mlm5wJEs6
— Ukraine Battle Map (@ukraine_map) April 19, 2026
Above: Footage of U.S. Navy destroyer USS Spruance, firing into the Iranian ship's engine room. The ship was captured.
Given the perennial hope in markets, we would anticipate GBP/EUR and GBP/USD downside to be relatively contained and for both pairs to advance if and when the U.S. and Iran get back to the negotiating table.
Domestically, this week will also see some political considerations as the UK Prime Minister will account for himself in Parliament on Monday over the Mandelson affair.
We reported last week that the British pound's outlook dimmed as a new political flare-up raises the odds that Starmer will be replaced by a fiscally incontinent left-winger.
On Tuesday, Sir Oliver Robbins will give his account to MPs on how the appointment of Mandelson as U.S. ambassador played out, which should offer further intrigue.
However, despite the piqued interest in UK politics it looks as though Starmer will survive this Mandelson episode as there are no challengers waiting to take the top job and we suspect that's wise: there's an inflationary and cost of living crisis coming down the line. They are better served waiting.