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Pound sterling started the day lower against the dollar and euro but pared those losses as investors bet the U.S. and Iran would muddle their way to a ceasefire extension.
It was a nervy start to proceedings Monday, with investors digesting overnight news that the U.S. had seized an Iranian cargo ship. Iran threatened to pull out of scheduled talks with the U.S. as a result.
Nevertheless, as we approach the close of play the U.S. confirms its team is still en route to Pakistan, and Iran hasn't backed up its claims it won't attend.
Having dipped in early trade, GBP/EUR and GBP/USD recover to flat as investors hold onto hope that at the very least the ceasefire will be extended beyond Tuesday's cutoff.
"On FX markets, the dollar failed to extend/hold gains at the open this morning," says an evening note from KBC Bank in Brussels. "The US currency apparently ‘needs’ higher risk-aversion and/or higher oil prices to really regain momentum."
On Friday we signed off with the good news that Iran had agreed to open the Strait of Hormuz, reporting that the pound was trading higher against the dollar and euro as a result.
But when we walked into the new trading week, we were met with a notable deterioration in the Middle East, as the Strait remained closed and Iran said it was unlikely to engage the U.S. in a second round of negotiations.
The leading headline was the U.S. had seized an Iranian-flagged tanker in the Strait after it failed to adhere to a U.S. blockade. Iran had a day earlier fired on an assortment of cargo carriers and threatened that round two of talks was a no go.
U.S. President Trump, in turn, rattled his sabre on his favourite social media channel:
"We’re offering a very fair and reasonable DEAL, and I hope they take it because, if they don’t, the United States is going to knock out every single Power Plant, and every single Bridge, in Iran. NO MORE MR. NICE GUY!"
Hallmarks of escalation were evident in GBP rates on Monday: Pound-dollar gapped lower to 1.3490, having been as high as 1.36 on Friday. It's back to 1.3526 at the time of this article's update. Pound-euro fell to 1.1473, but is back at 1.1485.
Further losses for the pound against the euro and dollar are likely in the coming days if the situation escalates.
However, the market response to this deterioration was relatively minor and certainly betrays ongoing market optimism over the matter.
"Any wobble could be short-lived and an opportunity to re-establish dollar shorts," says a weekly FX note from Barclays.
Insane footage of a US 🇺🇸 Navy destroyer, USS Spruance, firing into a cargo ship’s engine room off the coast of Iran after repeated warnings to turn back pic.twitter.com/6mlm5wJEs6
— Ukraine Battle Map (@ukraine_map) April 19, 2026
Above: Footage of U.S. Navy destroyer USS Spruance, firing into the Iranian ship's engine room. The ship was captured.
Given the perennial hope in markets, we would anticipate GBP/EUR and GBP/USD downside to be relatively contained and for both pairs to advance if and when the U.S. and Iran get back to the negotiating table.
Domestically, this week will also see some political considerations as the UK Prime Minister will account for himself in Parliament on Monday over the Mandelson affair.
We reported last week that the British pound's outlook dimmed as a new political flare-up raises the odds that Starmer will be replaced by a fiscally incontinent left-winger.
On Tuesday, Sir Oliver Robbins will give his account to MPs on how the appointment of Mandelson as U.S. ambassador played out, which should offer further intrigue.
However, despite the piqued interest in UK politics it looks as though Starmer will survive this Mandelson episode as there are no challengers waiting to take the top job and we suspect that's wise: there's an inflationary and cost of living crisis coming down the line. They are better served waiting.
