Pound Sterling rose 0.45% to near 1.3255 against the US Dollar on Monday during European trading. The move followed Iran saying it is reviewing a US ceasefire proposal, which supported a risk-on mood.
Safer assets fell out of favour as appetite for riskier assets improved. The US Dollar Index (DXY) dropped 0.35% to near 99.85, after trading slightly higher in Asian hours.
Iran said it received the ceasefire proposal via Pakistan, but said it would not accept deadlines or pressure. It also dismissed reopening the Strait of Hormuz in exchange for a “temporary ceasefire”.
A Reuters report earlier said the two countries were discussing a two-tier agreement. The report said it included plans to end hostilities by Monday.
In the UK, attention is on whether the Bank of England will raise interest rates in coming meetings amid the Middle East conflict. Last week, BoE Governor Andrew Bailey told Reuters policy action could be warranted if an oil price shock becomes a key factor, and warned prolonged energy shocks could weigh on growth.
In the US, markets are waiting for the ISM Services PMI for March at 14:00 GMT. Forecasts put it at 55.0, down from 56.1 in February.
We are seeing a classic risk-on move driven by hopes of de-escalation in the Middle East, with the Pound gaining against a weaker US Dollar. The potential for an Iran-US ceasefire is encouraging traders to move away from the safety of the dollar for now. This sentiment shift suggests selling overpriced, near-term volatility on currency pairs like GBP/USD might be a prudent strategy.
Options traders should note that one-month implied volatility for Cable has dropped from over 9% to 7.8% in the last 48 hours on this news. Given the pattern, we could see further compression if diplomatic channels remain open, making short vega positions attractive. However, any headline suggesting the talks have failed would cause a sharp reversal.
The situation remains complex because of energy prices, which directly impact the Bank of England’s thinking. With Brent crude still trading stubbornly above $90 a barrel, last week’s hawkish comments from Governor Bailey about tackling energy-driven inflation still resonate. This underlying inflation risk provides a floor for the Pound, even as geopolitical tensions ease.
This is a different story than in the US, where the latest core PCE inflation data came in at a more manageable 2.6% year-over-year. This divergence gives the Federal Reserve more flexibility than the BoE, which remains cornered by high energy import costs. This fundamental difference will likely drive currency pair movements long after the current geopolitical news fades.
When we look back at the market reaction to the Red Sea shipping disruptions in late 2025, we saw a similar dynamic play out. The initial dollar rally on risk-off sentiment quickly faded as markets priced in the inflationary consequences for Europe and the UK. History suggests the second-order effects on monetary policy are more important than the initial knee-jerk reaction.
Looking ahead, the key data point will be this Friday’s US jobs report, followed by the CPI inflation release next week. A strong jobs number combined with sticky inflation could quickly reverse the dollar’s recent weakness and test the Pound’s newfound strength. Therefore, holding long dollar calls as a portfolio hedge could be a cost-effective way to protect against a shift in market focus back to US economic strength.
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