Where are exchange rates as we reach the middle of spring 2026? The war in Iran has put a spoke in the wheel of central banks’ attempts to curb inflation and that’s had a knock effect on exchange rates.
Six weeks on from the start of the war in and around Iran, the pound and euro have both recovered against the US dollar to where they were before the conflict started on 1 March.
However, the oil price is still around the €100 per barrel level and there are clear signs that the economy is slowing down, as evidenced by business services such as the Purchasing Managers’ Index (PMI). In the meantime, inflation appears to be rising, leaving UK, US and European economies at the risk of ‘stagflation’ – stagnation + inflation.
The International Monetary Fund (IMF) provided a gloomy dose of reality. The vast majority of economies would see output fall and inflation rise even in a ‘mild’ scenario, according to a new report.
On top of all this, President Trump’s social media messaging is looking increasingly unbalanced, while according to some sources the UK is just . two the three weeks away from running out of jet fuel. Also in the UK, we’re just three weeks from a local election that could precipitate a political crisis…
GBP: Pound boosted as dollar eases back
Sterling’s early-April wobble has faded, helped by that “risk-on” shift. Since the start of the month sterling has been modestly firmer against the euro and more clearly stronger against the dollar. This fits with the broader pattern of the dollar softening as oil prices fell.
But what of the UK economy? The Bank of England held its interest rate at 3.75% in March, and the next decision is due on 30 April. Between now and then, inflation and growth data will do most of the talking, as we approach a period of high-level data (see below). This week we have had a sharp spike in retail sales, but this probably down to easter being early.
The IMF’s projections for the UK were particularly worrying. It knocked 0.5% off its growth projection for the UK economy in 2026, taking it from 1.3% to just 0.8%. At the same time, it now believes unemployment will peak at 5.6% as the gas-dependent economy bears the brunt of the energy supply crunch.
In UK politics a clear breach has opened up between cabinet colleagues the Energy Secretary Ed Miliband and the Chancellor Rachel Reeves, over drilling for oil and gas in the North Sea. Ed is against Rachel is for, but which way will Keir Starmer lean? With the local election result coming on 8 May, the result could encourage the PM to make a decision.
GBP/EUR past year
EUR: Euro weakened by Lagarde optimism on war
The euro has been pulled back this week after ECB president Christine Lagarde suggested that interest rate rises may not after all be necessary. A reminder to readers, that although higher inflation leading to higher interest rates is generally negative all round, it can nevertheless strengthen a currency.
On the inflation question, final results for March are showing rise in inflation from early estimates. Spain hit 3.4%, France 2% and Germany 2.8%. (Still all below the UK pension rise of 4.9% though).
Much of Europe, the pro-EU, pro-Ukraine, liberal side anyway, will have been cheered by the end of Victor Orban’s reign in Hungary, but being outside the eurozone (they use the forint), the impact has been minimal.
EUR/USD past year
USD: Safe-haven demand fades – but the market is still jumpy
The dollar’s month has been dominated by headlines rather than spreadsheets. When the Iran story intensified, the greenback benefited from risk aversion. As ceasefire news hit and oil prices slid, that support eased — and the dollar gave back ground.
Policy still matters in the background. The Fed kept its target range unchanged in March, and the next scheduled decision is later this month. If energy stays calmer, markets will pay more attention to inflation and jobs again. If the geopolitics flare up, the dollar can regain its footing quickly.
USD/GBP past year
What’s coming up: key events to watch
Looking ahead, several important economic events could influence exchange rates over the next couple of weeks:
- UK, GDP (16 April)
- UK, unemployment (21 April)
- EU, EU and German ZEW Economic Sentiment Index (21 April)
- UK, Inflation (22 April)
- Global, PMI (23 April)
How to protect your own budget
Exchange rates can shift quickly – and when you’re moving large sums for a property purchase, that can mean thousands gained or lost. Speak to a currency specialist to discuss tools like forward contracts, which let you lock in an exchange rate for the future, shielding your budget from adverse movements.
