CAPITALDIGEST MARKET REVIEW, 30/03/2026
March 30, 2026
POUND HEADS FOR BIGGEST MONTHLY LOSS AGAINST THE SAFE-HAVEN DOLLAR SINCE OCTOBER
The pound fell for a fourth day on Friday, as it headed for its weakest monthly performance against the dollar since October, as fears of a global energy shock from the Middle East war have driven investors into the U.S. currency as a safe haven. Sterling has fallen by 1.5% in March, slightly more than in February, making this its worst monthly performance since last October. But the pound is also the best performing currency against the dollar since the war started. The euro is down around 2.5% in that time, while the safe-haven yen and Swiss franc have lost 2.4% and 3.6%, respectively. The Bank of England, which prior to the war had been expected to cut rates twice this year, is now expected to deliver as many as three hikes, according to money markets, compared with expectations in a Reuters poll for no change in 2026. Bank of England policymaker Alan Taylor said on Thursday that he saw a high bar to hiking interest rates and it was preferable to hold borrowing costs until there was greater clarity on the impact on the economy from the war with Iran. Taylor, who until the start of the conflict was a long-time advocate for lower interest rates, voted this month to leave them on hold, as did all the other eight members of the Monetary Policy Committee, some of whom warned rate hikes could happen. Given how much higher inflation is in Britain than in other developed economies, UK government bonds have been sold more aggressively, which has pushed up yields more quickly – something that theoretically offers the pound some support. Two-year gilt yields, which are the most sensitive to expectations for inflation and interest rates, are up by almost a percentage point since the war started, near their highest for almost 2-1/2 years . “Sterling remains largely resilient but higher borrowing costs, if sustained, alongside weaker growth will inevitably reduce fiscal headroom,” analysts at Bank of America, who recommend selling the pound against the dollar, said in a note. The UK’s borrowing costs are far higher than almost every other developed-market economy and finance minister Rachel Reeves is under pressure to keep the government’s finances on track, given that she has limited room for manoeuvre..
STERLING FALLS FOR A THIRD DAY AS INVESTORS FAVOUR SAFE-HAVEN DOLLARS
The pound fell against the dollar for a third day on Thursday, as investors favoured the U.S. currency above most other assets in the face of a rising oil price and no end in sight for the war in the Middle East. Sterling, which has lost nearly 1% in value against the dollar this month, was last down 0.1% on the day at $1.336. The pound was a touch stronger against the euro , which traded down 0.1% at 86.44 pence, bringing its losses for the month to 1.4%. This is the euro’s worst monthly performance against the pound since November 2024, when it fell 1.6%. For markets, the main focus is the oil price, which has risen by around 45% since the war started in late February. As a result, investors expect central banks, including the Bank of England, to have to shift to raising rates to combat the risk of a damaging spike in inflation. The BoE, which prior to the conflict had been expected to cut rates twice this year, is now expected to raise rates at least twice before the end of the year, as is the European Central Bank, according to money markets. Traders are attaching a roughly 40% chance of the Federal Reserve raising rates once this year. This mismatch would ordinarily boost the pound, but given Britain’s dependence on energy imports, as well as its more fragile government finances and higher borrowing rates, sterling has come under fire over the last month. BoE Deputy Governor Sarah Breeden said on Thursday she saw less risk of second-round inflation effects from rising energy prices caused by the Iran war than from Russia’s full-scale invasion of Ukraine in 2022, due to a softer labour market. “Where we are now is very different to 2022 when we had the last energy shock,” she told an event hosted by the Resolution Foundation think tank. A number of strategists have said they feel the BoE has far less room to raise rates this year and, as such, some of those bets on successive rate hikes could be unwound, which would leave sterling vulnerable to a pullback. “We still see some upside risks for euro/sterling due to the larger room for dovish repricing in a de-escalation scenario for the sterling curve. A move past 87.0 in the coming weeks remains our baseline,” ING strategist Francesco Pesole said.
DOLLAR RISES ON SAFE-HAVEN DEMAND, YEN SLIDES AS MIDDLE EAST RISKS MOUNT
The dollar rose on Friday and was on course for its strongest monthly gain in almost a year, buoyed by safe-haven demand as the Middle East war intensifies and hopes fade for de-escalation. The yen was particularly under pressure, falling in afternoon trading to its weakest since July 2024 and raising the possibility of currency market intervention by the Japanese authorities. Iran is expected to respond on Friday to a U.S. peace proposal to end the war, with U.S. President Donald Trump and senior White House officials told by interlocutors to expect a counter-proposal. U.S. Secretary of State Marco Rubio said that the war was expected to last weeks, rather than months, and that U.S. objectives could be met without ground troops. U.S. consumer sentiment slipped to a three-month low in March as war-driven oil price rises weighed on the economic outlook. Safe-haven flows underpinned the dollar, which has also been lifted by rising expectations for a U.S. rate increase this year. The dollar index rose 0.3% to 100.17, up 2.57% so far in March and on course for its best monthly showing since July 2025, when it rose 3.4%. “Weekend trading is also, to a certain degree, taking hold in terms of what you might or might not want to be long or short over the weekend,” said Marvin Loh, senior global market strategist at State Street in Boston. “The dollar has been pretty correlated with risk these days in the correct way.” While senior Iranian officials said diplomacy continued, the Islamic Revolutionary Guard Corps reiterated a ban on all shipping through the Strait of Hormuz that was linked to allies of the U.S. and Israel. Markets stayed on edge at the end of another volatile week, as Trump again extended a deadline for striking Iran’s energy facilities even as Washington and Tehran offered starkly conflicting accounts of diplomatic progress. The Pentagon is considering sending up to 10,000 more ground troops to the region, the Wall Street Journal reported, further dimming investor hopes of a near-term end to the war. Against the dollar, the yen fell 0.34% to 160.35 yen, crossing the 160 yen level for the first time since July 2024, when Japanese officials last intervened to prop up the currency. The yen, down 2.74% so far this month, also came under pressure from another jump in Japanese bond yields after the Bank of Japan published new estimates for its neutral rate, which signalled that policymakers are prepared to raise rates to counter inflation. Japan’s heavy reliance on imported energy leaves it more exposed to higher prices than many other major economies. “The dollar’s strength is continuing with some of the volatility we see, so that is going to be a little bit of the catalyst for that stronger dollar/yen,” said Loh. The euro slipped 0.17% to $1.1509, while sterling fell for a fourth straight session, down 0.48% at $1.3268. The risk-sensitive Australian dollar was 0.2% lower at $0.687, after falling to a two-month low. The currency has lost around 3% since the start of the war, making it the second-worst performer among major currencies after the Indian rupee , which is down 5.37%. Richmond Fed President Thomas Barkin said uncertainty surrounding the war and the adoption of artificial intelligence supports the Federal Reserve keeping rates steady. Philadelphia Federal Reserve President Anna Paulson also highlighted the risks to growth and inflation related to the war. “Until a month ago, the Fed futures were predicting, as was the Fed itself, one more rate decrease this year,” said Joseph Trevisani, senior analyst at FX Street in New York. “That has completely reversed. The direction that the speculation goes is now on rate increases.” The Bank of England and the European Central Bank are also expected to tighten policy, part of a broader shift in rate expectations that has hammered bonds and pushed yields to multi-year highs this month. U.S. Treasury yields inched higher on Friday after jumping overnight. The two-year yield stood at 3.914%, while the benchmark 10-year yield rose 2.2 basis points to 4.438%.
POUND LOSES FOOTING, BUSINESS ACTIVITY GROWTH SLOWS ON IRAN WAR HIT
The U.S. dollar hit a two-week high on Thursday as fresh volatility gripped stocks and the pound tumbled after the Bank of England voted by a razor-thin margin to leave UK rates unchanged. The greenback found firmer footing this week as investors turned more risk-averse and financial markets assessed results so far in the U.S. corporate earnings season, now halfway complete. The dollar largely stayed range-bound after a run of softer U.S. labor data, including jobless claims rising more than expected and unexpectedly low job openings in December. “Now the issue is, to me, whether we go broadly sideways or is there a deeper dollar bounce in store for us,” said Marc Chandler, chief market strategist at Bannockburn Global Forex in New York. “Because inflation is still a bit elevated and the economy is still solid, it seems to me that the Federal Reserve is not in a hurry to cut rates again, and that sets us up for when Warsh takes over.” Chandler added that markets expect softer data once Kevin Warsh, nominated as the next Federal Reserve chair, takes up his post. However, his confirmation may face hurdles, with some Republicans saying they will not proceed until an inquiry into current Fed Chair Jerome Powell is resolved. The dollar index, which measures the U.S. currency against a basket of six others, was last up 0.18% at 97.85, rising for a second day. It rose to its highest since January 23 earlier in the session. Gold and silver, which have become more volatile as a result of leveraged buying and speculative flows, were rocked by a fresh selloff on Thursday. Silver fell 15.66% to $74.25 an ounce. The Nasdaq Composite has fallen 2.9% over the past two days, its biggest slide since October, with volatility triggered by market bellwethers including Google parent Alphabet (GOOGL.O), opens new tab, which reported aggressive spending plans on Wednesday, and a rout in software stocks as they adapt to a new era of generative AI. Sterling was last down 0.75% against the dollar at $1.3550 and off 0.62% versus the euro, after the BoE left borrowing costs unchanged in a 5-4 split among the nine policymakers that make up its rate-setting committee. The pound, which fell to a two-week low, was under intense pressure all day from concern about the stability of the British government and whether Prime Minister Keir Starmer could survive the fallout from his decision to appoint Peter Mandelson as U.S. ambassador despite knowing about his ties to Jeffrey Epstein. “It was always likely that the PM could be fighting for his job after the May local election. Now it seems that a leadership challenger could come earlier,” said Jane Foley, head of FX strategy at Rabobank London. “The pound would be particularly unsettled if the Labour leadership went to the left wing of the Labour Party.” The European Central Bank also delivered no change in interest rates at its policy meeting on Thursday. The euro was last down 0.16% at $1.1788. Markets show traders see little chance of an ECB rate cut this year. Even with the volatility that has dominated markets since the start of the year, the euro is only about 0.4% above where it was when the ECB last met in December. However, the euro is 13% higher against the dollar than it was a year ago, which has added to concern among policymakers about the impact on regional price pressures, while inflation in the euro zone has fallen to around 1.7%, below the ECB’s target of 2%. In the crypto market, bitcoin hit its lowest since October 2024. It fell 11.65% to $64,162.66, its biggest one-day drop since November 2022. Ether slumped to a nine-month low, and was last down 12.4% at $1,862.
STERLING STEADY AS TRADERS REMAIN CAUTIOUS ABOUT EFFORTS TO END IRAN WAR
Sterling was steady on Wednesday with traders cautious about efforts to end the U.S.-Israeli war against Iran as they took stock of the conflict’s potential economic impact. The pound was last little changed against the dollar at $1.3402. Israel and Iran exchanged airstrikes on Wednesday, as Iran’s military rejected U.S. President Donald Trump’s assertion that Washington was in direct negotiations with Tehran to end the war. Oil prices eased, with Brent crude futures last down around 5.4% at $95.82 a barrel. Meanwhile, British consumer price inflation held at 3% in February, unchanged from January’s rate, official figures showed on Wednesday, ahead of a likely upward lurch as the war in the Middle East pushes up prices. “Today’s inflation report is little more than a relic of the world before the Iran conflict. While the February report was broadly in line with expectations, and confirms that inflation was on a path back to 2%, the outlook for inflation has radically changed,” Luke Bartholomew, deputy chief economist at Aberdeen, said. Inflation expectations have picked up sharply since the start of the Iran war as oil prices have spiked. An indication that the war in the Middle East is affecting the British economy came on Tuesday as a survey showed that British business activity grew at the slowest pace in six months in March and manufacturers’ input costs saw the biggest month-on-month acceleration since 1992. As economic expectations have shifted, so have Bank of England interest rate projections. Markets were last pricing in a roughly 67% chance of the BoE hiking rates at its next meeting in April, and were projecting at least two policy increases by the end of the year. Before the Middle East conflict, the BoE had been expected to cut rates twice this year. Many economists, however, appear more cautious about potential rate hikes than markets. How the BoE reacts will depend on whether the upward pressure on inflation from the rise in energy prices puts upward pressure on prices beyond energy itself and food and manufactured goods, where it is a key input. We doubt that it will,” Andrew Wishart, senior UK economist at Berenberg, said. “Sluggish economic growth and a growing margin of slack in the labour market suggest that firms’ pricing power and workers’ bargaining power are insufficient for a new price-wage spiral to begin.” Sterling was last steady against the euro at 86.54 pence.
