The Israel-Iran conflict, which the USA has now joined, is likely to have global repercussions. For anyone with significant transactions to make overseas, into any currency, there could be sharp movements in exchange rates.
The escalation of military conflict between Israel and Iran, and the subsequent bombing by the United States of Iran’s nuclear sites, has taken global financial markets by surprise. What could be the implications for your finances?
Your exchange rate
The effect on sterling has been sharp movements that have not led anywhere very long lasting, so far. Will that last?
GBP/USD has moved up and down in fits and spurts but remains close to a three-year high. GBP/EUR has had some spectacular spikes and troughs and is close to 2% down on last month, but compared to the kind of falls we saw after Brexit, Covid19 or Liz Truss’s budget, overall this is fairly muted.
However, these are early days, and we await to learn Iran’s (and its proxies’) response.
Risk appetite
Global investors with huge amounts of money at stake put their money into assets that are safe or risky, or at least safer or riskier, according to their risk “appetite” and the potential rewards. When conflict erupts, no-one entirely knows where it will end. The murder of an arch-duke in Sarajevo in summer 1914 rapidly resulted in the permanent upending of the global economy.
So, when something like the attack on Iran occurs, money is switched to assets seen as safe. This is generally, even when the USA is involved, the US dollar. But also the Japanese yen, Swiss franc and euro. These currencies tend to strengthen. The pound is no longer really taken as a safe haven, so it will usually weaken when the markets avoid risk (known as “risk off”).
Fuel costs and energy prices
Rising oil prices are the most immediate effect of conflict in the Gulf region. Around a fifth of oil is exported through the Strait of Hormuz, a narrow maritime corridor on one side of which is Iran.
Will oil get through the Straits of Hormuz? ( Below the Sky / Shutterstock.com)
Any disruption to this route increases uncertainty and pushes up oil prices. Within a week of the conflict intensifying in June 2025, Brent crude oil rose from under $70 per barrel to over $78 – its highest since late 2024. With the involvement of the USA, it seems more likely that the Straits wil be mined or otherwise closed, at least for a while. Oil at $100 per barrel is entirely feasible. Oil price changes take a week or two to hit the petrol station forecourt, but drivers can expect higher fuel costs this summer and autumn.
The bigger impact, however, will be on transport costs of everyday goods. Oil doesn’t just affect pump prices. Transport and manufacturing rely on it too, so higher oil costs ripple through the wider economy. If conflict continues into autumn, UK households could see additional pressure on everyday bills.
Interest rates and mortgages
The Bank of England held interest rates at 4.25% at its meeting last week, but the voting pattern clearly suggested a rate cut in August. Saturday’s attack by the USA and potential impact on petrol and other prices clearly puts that at risk.
The Bank of England has to keep inflation as close to 2% as possible, yet it is already at 3.4%. It may now be forced to delay any reductions until late 2025.
Borrowers with mortgage deals ending this year should prepare for a higher cost when remortgaging. Mortgage pricing is influenced by swap rates – the cost banks incur when borrowing from each other – which are themselves dictated by market expectations of future Bank of England base rates. Any indication that interest rates must remain higher for longer to suppress energy-driven inflation leads swap rates to climb, making mortgages more expensive.
Inflation outlook
Economists now expect inflation to exceed 3.7% by autumn – and potentially climb close to 4% if the oil price continues to rise. According to The Economist, a $10 uplift in oil prices typically adds between 0.1 to 0.2 percentage points to annual inflation.
A worst-case scenario involving prolonged disruption to shipping in the Gulf could add up to 1% to inflation by the end of the year. This would push inflation back over 4.5% – a level that would delay interest rate cuts well into 2026.
The Bank of England remains committed to lowering inflation using its monetary policy tools. However, it has limited power to control commodity-driven cost pressures. For households, the result could be sustained high borrowing costs and slower reductions in goods prices.
Pensions and investments
Despite the conflict, global stock markets have shown unexpected resilience. The FTSE 100 has only dipped by around 1% since Saturday’s attack, and the S&P 500 in the United States by barely half a percent. Investor confidence has not evaporated.
However, if oil prices continue upward or global trade is disrupted, the risk of a market correction increases. Inflation worries tend to weigh on equities, particularly in sectors sensitive to borrowing costs like construction, technology and consumer finance.
For investors nearing retirement or relying on income from stock portfolios, diversification and caution are key. Speak with a financial adviser before making large changes to your holdings, especially under volatile conditions.
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