GBP Surges as BoE Turns Hawkish While Oil Volatility Shakes FX Markets

Key Highlight

• Sterling leads G10 currencies as the Bank of England adopts a more hawkish stance compared to peers

• Oil-driven volatility returns with prices jumping over 10%, offering renewed support to the US dollar

• ECB leans towards further tightening, with April rate hike expectations strengthening

Market Recap

Thursday’s session was shaped by a combination of central bank decisions and geopolitical developments, driving notable moves across FX markets.

The Bank of Japan held rates steady, but a more hawkish tone from Governor Ueda briefly supported the yen. Meanwhile, a sharp escalation in Middle East tensions triggered a surge in oil prices, which rose by more than 10% following attacks on key energy infrastructure. This injected volatility into currency markets and temporarily underpinned the US dollar.

However, the clearest takeaway came from central bank divergence:

• The Bank of England delivered a strong hawkish signal, holding rates at 3.75% with a unanimous vote and reinforcing its readiness to act if needed. This marked a notable shift in tone, pushing UK yields higher and increasing expectations for future tightening.

• The European Central Bank also maintained a hawkish bias, revising inflation forecasts higher and keeping rate hike expectations alive for April.

• In contrast, the Federal Reserve remained more cautious, with markets viewing it as less likely to tighten aggressively in the near term.

As a result, GBP outperformed, rising around 1% against the dollar, while EURGBP dynamics pushed sterling towards multi-month highs.

Market Update

Geopolitics remains the primary driver of market sentiment, though there are early signs of stabilisation. Oil prices have pulled back from recent highs after easing tensions but remain elevated enough to keep inflation risks firmly in focus.

For currency markets, three key themes are emerging:

1. Central bank divergence is driving FX direction

The Bank of England’s more assertive stance contrasts with a more cautious Federal Reserve and a moderately hawkish ECB. This divergence is currently supporting sterling, particularly against the dollar.

2. Oil remains a key inflation and currency driver

While prices have eased slightly, elevated oil levels continue to:

• Sustain inflation concerns globally
• Provide intermittent support to commodity-linked currencies
• Create uncertainty around future central bank decisions

3. Downside risks for GBP remain

Despite recent strength, the UK’s fiscal position is a growing concern. A larger-than-expected budget deficit highlights underlying pressures that could:

• Weigh on investor confidence
• Put upward pressure on gilt yields
• Limit further GBP upside if sustained

Bottom Line

Markets are being pulled in two directions:

• Hawkish central banks (BoE, ECB) supporting currencies like GBP
• Geopolitical risks and oil volatility driving uncertainty and inflation concerns

With policymakers balancing inflation pressures against slowing growth, FX volatility is likely to remain elevated in the near term, creating both risk and opportunity for businesses with currency exposure.

20th March 2026

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