Official White House Photo by Daniel Torok
Middle East peace hopes massage oil prices lower, but UK's GDP slowdown points to macro headwinds further out.
Pound sterling hovers just below €1.1590, leaving it poised to launch an attack on its technical nemesis, the 1.16 barrier.
The pound to euro exchange rate is therefore holding a bullish near-term setup, consolidating near the top of its long-running range, helped by an improvement in global investor sentiment that followed the decision by U.S. President Donald Trump to call off attacks on Iran, citing an impending peace deal.
That decision pressured oil prices below $90 / barrel and helped global stock markets stage a solid recovery, reflecting a meaningful improvement in investor sentiment.
"Oil prices have eased back into the mid-$80s per barrel, their lowest levels in two months, as hopes of a diplomatic breakthrough take some of the immediate risk premium out of the market," says Matt Britzman, senior equity analyst at Hargreaves Lansdown.
That sentiment helps consolidate GBP/EUR action near the range highs but creates a more meaningful tailwind for a recovering pound to dollar exchange rate (GBP/USD): the pair rises to 1.3402, but there's now scope for the move to extend to the gravitationally relevant 100-day moving average located up at 1.3471.
Sterling's Near-term Tailwinds
So, it's investor vibes that are in control of FX and the takeaway is this: the downside is better protected as the ability of the war in the Middle East to harm sentiment is meaningfully diminished by confirmation Trump clearly does not have the appetite to escalate the situation.
Trump pulled back threatened military strikes against Iran, a stark reversal that came just hours after he vowed to hit the Islamic Republic “VERY HARD” and threatened to seize its oil infrastructure.
The prospect for softer oil prices builds, and that's a headwind for the dollar that can help lift GBP/USD.
"Is the Dollar weakness story over? The Dollar is up versus the G10 this year. That's about markets pricing Fed hikes, which I think is wrong. The Dollar versus EM is down. That's the leading signal to pay attention to. USD will fall sharply when war ends," says Robin Brooks, Senior Fellow at the Brookings Institute.
Those wanting a higher GBP/EUR should be wary, however, as the elevated oil prices caused by the war helped uplift UK bond yields, and that's fed into a firmer pound; indeed, GBP is the third-best performing G10 currency since the advent of the war.
GBP can slide meaningfully if inflation expectations collapse in the coming weeks as war premiums creep out of financial markets. To be clear, it's going to take time, but the contours of that happening are emerging.
Medium-term Outlook Clouded by Macro Slowdown
Domestically, headwinds are also blowing for the pound: despite a strong start to the year, a marked slowdown is now likely.
The ONS said the economy contracted 0.1% in April, even though the growth in the tree months to April still benefited from a stronger start to the year by growing 0.7%.
The pattern is clear: the UK economy tends to start each year on a strong note but rapidly lose altitude as the months slide by.
By all accounts, the pattern is repeating in 2026.
"Our business surveys report that underlying momentum remains subdued across much of the private sector as global shocks compound domestic headwinds, with businesses facing growing pressure from elevated costs and uncertainty," says Ben Jones, Senior Lead Economist at the CBI.
The prospect of a slowing economy and capped inflation concerns owing to the prospects of an end to the Middle East war opens the door to Bank of England rate cuts in the coming months.
When rates market moves to reflect that, we'd imagine GBP comes under more concerted pressure; so it's a case of more near-term strength, but the contours of weakness are emerging.