Ceasefire Proposal And Market Reaction
Iran said it received the ceasefire proposal through Pakistan but stated it would not accept terms set by deadlines or pressure. Tehran also rejected reopening the Strait of Hormuz in exchange for a “temporary ceasefire”. A Reuters report earlier said the two sides were discussing a two-tier deal, with plans to end hostilities by Monday. In the UK, attention is on whether the Bank of England could raise interest rates in coming meetings amid the Middle East conflict. BoE Governor Andrew Bailey said policy action may be needed if an oil price shock becomes a key factor, and warned that a prolonged energy shock could weigh on growth. In the US, markets await the ISM Services PMI for March at 14:00 GMT, expected at 55.0 versus 56.1 in February. We recall this period in April 2025 when hopes for a Middle East ceasefire briefly lifted the pound against the dollar. That optimism was short-lived, as the talks faltered later that year, leading to a sustained period of geopolitical tension. The risk-on sentiment we saw then quickly evaporated, reminding us how sensitive currency markets are to these events. The Bank of England’s concerns about an oil price shock proved to be well-founded. Following the breakdown of talks in mid-2025, Brent crude prices surged, averaging over $98 a barrel in the fourth quarter of last year. In response, the Bank of England hiked its interest rate twice, bringing it to 5.75% by November 2025 to combat the resulting inflation.Rate Expectations And Volatility Outlook
This hawkish stance has had a lasting impact on the market’s expectations for this year. UK inflation remains stubbornly high, with the latest report for February 2026 showing CPI at 3.9%, keeping the pressure on the central bank. Consequently, derivatives markets are pricing in only a 25% probability of a rate cut before 2027, a significant shift from the sentiment a year ago. For traders, this suggests that volatility in the pound may remain elevated. One-month implied volatility for GBP/USD options has been trading in a higher range, around 9.0%, compared to the 6.5% levels seen in early 2025. This indicates that strategies protecting against sudden price swings, such as buying straddles, could be prudent. The US dollar’s position has also changed from what we saw last year. While the US ISM Services PMI did dip in March 2025, recent data shows the US economy has been more resilient, with Q1 2026 GDP growth coming in at 2.1%. This economic strength means the dollar is less likely to weaken significantly, creating a potential cap on any major rally in the GBP/USD pair. Create your live VT Markets account and start trading now.
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