USD Strengthens as Middle East Tensions Rise While GBP Weakens on BoE Rate Cut Expectations | FX Market Update

Key Highlight

• USD continued to strengthen as geopolitical tensions around Iran and the Strait of Hormuz increased demand for safe haven currencies

• GBP remained under pressure as expectations for future Bank of England rate hikes were reduced significantly, weakening support for Sterling

• EUR struggled to gain momentum despite firm messaging from the ECB, as wider market caution and USD demand outweighed the positive interest rate outlook

Market Recap

The US Dollar extended recent gains following renewed clashes between US and Iranian forces near the Strait of Hormuz overnight. Market sentiment remains heavily driven by developments in the Middle East, with investors continuing to favour safe haven assets during periods of uncertainty.

Sterling weakened further as markets reduced expectations for Bank of England tightening through 2026. Investors are now pricing in only 42bps of additional hikes, compared to previous expectations for two full rate increases. This shift has reduced one of the main supportive factors behind GBP in recent months.

The Euro was unable to benefit from increasingly hawkish commentary from the European Central Bank. ECB Chief Economist Philip Lane indicated inflation forecasts are likely to be revised higher in June, while policymakers reiterated their commitment to controlling inflation. Despite this, the EUR failed to gain traction as broader risk aversion and continued USD demand dominated market direction.

Market Overview

The Reserve Bank of New Zealand kept interest rates unchanged at 2.25% but surprised markets with a more hawkish tone. The decision revealed a split vote among policymakers, leading markets to sharply increase expectations of a July rate hike. This supported the New Zealand Dollar, with GBPNZD falling following the announcement.

Geopolitical developments involving Iran and the Strait of Hormuz remain the key driver for global markets. Any further escalation is likely to continue supporting the USD and JPY, while signs of easing tensions could improve risk appetite and weaken safe haven demand.

Attention today will also turn to the Richmond Fed manufacturing data from the US. While this release does not typically move markets significantly, any signs of slowing US economic activity could limit further USD strength.

Month end trading flows may also influence currency markets over the coming days. Barclays rebalancing models suggest fund managers may need to reduce USD holdings against several major currencies before the end of May, following strong performance in US equities. This could help limit additional USD gains despite the current supportive backdrop.

27th May 2026

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