GBP Inflation Stays Sticky as BoE Turns Hawkish | USD Outlook and Iran Tensions Drive FX Markets

Key Highlight

• GBP: Inflation remains persistent, increasing the likelihood of further tightening from the Bank of England

• USD: Trading in a holding pattern, but sensitive to rate expectations and geopolitical risk

• EUR: Supported by a more hawkish stance from the ECB

Market Recap

Market sentiment remained fragile throughout yesterday’s session, largely driven by ongoing and often conflicting geopolitical developments between the US and Iran.

Comments from Donald Trump suggested progress towards a ceasefire, while Iranian officials pushed back firmly, denying that any meaningful negotiations had taken place and rejecting proposed US terms. This divergence in messaging continues to create uncertainty across global markets.

On the data front, UK inflation figures met expectations at 3.0% year-on-year; however, core inflation surprised to the upside at 3.2%. This follows earlier PMI data pointing to underlying price pressures, reinforcing concerns that inflation in the UK is proving more persistent than anticipated.

Bank of England policymaker Megan Greene echoed this sentiment, warning that inflation risks may have increased significantly. She also highlighted a sharp rise in consumer inflation expectations, with a recent Citibank survey showing a jump to 5.4% for the year ahead, the largest monthly increase in over two decades. This raises concerns that inflation psychology may be becoming more entrenched.

Market Update

Although the latest UK inflation data came in as expected, it was released before the recent surge in oil prices linked to escalating tensions in Iran. With inflation still well above the Bank of England’s 2% target, the outlook is shifting and upcoming policy meetings are increasingly likely to involve serious discussions around further rate hikes.

Geopolitics will remain a key driver in the near term. Markets are reacting rapidly to headlines, with uncertainty around the true state of US–Iran negotiations continuing to fuel volatility. While Trump maintains that discussions are ongoing, the broader situation suggests that a resolution may not be imminent. Any signs of military escalation, particularly involving US ground forces, would likely trigger further market reactions.

Looking ahead, attention now turns to a series of Federal Reserve speakers due later today. Their commentary will be closely scrutinised for signals on the future path of US interest rates.

An upward shift in rate expectations could provide renewed support for the US dollar, particularly if combined with ongoing geopolitical uncertainty.

26th March 2026

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