Dollar Strength Surges as Middle East Tensions Escalate | GBP Outlook Under Pressure

Key Highlight

• Escalation risks have resurfaced after Donald Trump signalled a more aggressive US stance toward Iran, lifting the dollar and Treasury yields.

• Risk-sensitive currencies have come under pressure, with AUD, NZD and GBP leading losses as market sentiment turns defensive.

• Sterling is showing relative weakness, with GBPUSD falling to 1.3218, highlighting its vulnerability in risk-off conditions.

Market Recap

Earlier in the week, markets briefly leaned toward a more constructive outlook. The dollar softened, extending recent losses as expectations grew that tensions in the Middle East could ease within weeks.

US data painted a mixed picture stronger retail sales contrasted with weaker employment signals leaving geopolitics as the primary market driver. Risk currencies benefited from this improved sentiment, with sterling outperforming and oil prices retreating below $100 per barrel.

However, this optimism proved short-lived. Overnight developments reversed the narrative, as renewed hawkish rhetoric from the US shifted sentiment sharply. This triggered a rebound in the dollar and a clear move back into safe-haven positioning.

Market Update

Geopolitical developments are once again dictating market direction. The return of escalation concerns has reinforced demand for the dollar, which is likely to remain supported in the near term unless tensions ease.

Upcoming US data releases today, including trade balance and jobless claims, are unlikely to significantly shift market direction unless there is a major surprise. For now, macro fundamentals are taking a back seat to geopolitical risk.

Sterling remains particularly exposed in this environment. With expectations for further tightening from the Bank of England having softened, the pound lacks strong underlying support and tends to underperform against safer or more stable currencies, particularly the euro, during periods of market stress.

With uncertainty elevated and Middle East headlines driving volatility, maintaining appropriate FX hedging strategies is key—especially for those exposed to further potential dollar strength if tensions persist.

2nd  April 2026

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