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Secretary of War Pete Hegseth conducts a press briefing on Operation Epic Fury at the Pentagon, Washington, D.C., March 4, 2026. DoW photo by U.S. Navy Petty Officer 1st Class Alexander Kubitza.

The pound is holding steady against the euro amidst rising bond yields but losing ground to the dollar as geopolitical tensions in the Middle East continue to shape global currency markets.

Sterling remains relatively resilient against the single currency, with GBP/EUR stabilising just below the 1.15 level following a recovery earlier in the week, while GBP/USD has slipped back to 1.3323 on Thursday as demand for the U.S. dollar persists.

There are still no signs of de-escalation in the conflict involving Iran, the United States and Israel, a backdrop that continues to support the dollar and keep pressure on the euro.

Yet, stable equity markets indicate investors' hope is difficult to extinguish, and any indication that Iran might be willing to negotiate will be latched onto and taken as a reason to buy.

Expect oil prices to stay elevated: in the past hour, UKMTO Operations Centre says an oil tanker that was anchored offshore Kuwait has been hit by an explosion and is taking on water.

Iranian strikes on U.S. sites in neighbouring Arab states continued overnight and U.S. Defence Secretary Pete Hegseth said in a press conference late Wednesday that the confrontation could last for weeks. "It could be six, it could be eight, it could be three."

Israel’s ambassador to the United Nations, Danny Danon, struck a similarly cautious tone, saying Iran still has "significant capabilities" and that “there’s still a long way to go."

Despite the deteriorating geopolitical backdrop, global equity markets have so far remained relatively calm, showing little sign of panic.

That equity market stability is important for sterling: as long as risk sentiment remains contained, the pound tends to benefit from rising short-term bond yields in the UK, which are currently offering support against most currencies apart from the dollar.

Rising oil and gas prices mean UK inflation will not fall as far as previously expected, and some economists now say the Bank of England will be unable to cut interest rates at all in 2026, which boosts those short-term bond yields that track central bank policy expectations.

As long as global equity markets aren't in a panic, the recovery in bond yields tends to support sterling, which has been the case this week.

"We expect the GBP to recover over the medium term as political clarity emerges post-May elections and the BoE nears the end of its easing cycle," says Constantin Bolz, Strategist at UBS.

The dollar continues to attract demand as energy markets remain under strain.

Matt King of Satori Insights says the greenback is being driven higher primarily by liquidity demand.

The USD is simply bid on “money flow” as investors scramble for liquidity while the conflict triggers a rapid unwinding of the “speculative froth” that had buoyed many markets in recent months.

The risks to markets remain elevated as oil and gas prices are still hovering near their highs as export facilities and key shipping routes in the Middle East remain disrupted.

The longer energy prices stay elevated, the greater the potential damage to the global economy and to equity valuations.

Adding to the strain, China has instructed domestic refiners to halt exports of diesel and gasoline after the conflict disrupted crude deliveries.

These developments suggest further stresses could emerge over the coming days.

If tensions persist and energy markets remain tight, the dollar is likely to stay well supported, keeping pressure on GBP/USD even as sterling holds relatively firm against the euro.