Sterling traded lower on Thursday, off about 0.1% at 1.3392 as of 03:38 ET (07:38 GMT), after a pause in the recent risk-on momentum as indications emerged that a ceasefire involving Iran might not hold.
Earlier gains for the pound, which had been supported by improved risk sentiment and broad dollar selling, were pared back when reports suggested the truce had been breached. While headlines noting progress in peace talks and the reopening of the Strait of Hormuz have been a supportive backdrop for markets, fresh uncertainty over the durability of the ceasefire has reintroduced a degree of caution among investors.
The change in tone has particularly affected higher-beta currencies, which had outperformed earlier in the week on expectations of reduced volatility and steadier energy prices. Because sterling tends to move with global risk appetite, it is especially sensitive to any new geopolitical developments that could alter that sentiment.
ING strategist Chris Turner noted that the preference for higher-beta currencies could remain in place if the de-escalation story endures, but he also cautioned that occasional setbacks are likely to spur renewed demand for the dollar.
Monetary policy signals have amplified the market reaction. Minutes from the U.S. Federal Reserve showed a mildly hawkish tilt, and market pricing for U.S. policy now reflects roughly 7 basis points of easing by year-end, down from about 15 basis points previously. Fed officials highlighted two-sided risks related to the conflict and signalled that quicker rate reductions could be considered if labour market conditions deteriorate more sharply.
By contrast, euro moves have proved more resilient. Expectations that the European Central Bank will keep rates firmer have provided a floor under EUR/USD, with markets pricing around 50-60 basis points of tightening by year-end. That dynamic has helped EUR/USD stay supported near the 1.1700-1.1730 area in the near term.
For sterling, relative downside risks versus the euro are apparent. The Bank of England is viewed as more likely to adopt a dovish stance if energy prices continue to ease, and policymakers had already shown some inclination toward rate cuts even before the recent geopolitical flare-up. Market expectations could be trimmed further in the coming weeks, particularly in advance of further remarks from Governor Andrew Bailey and other officials.
Across Central and Eastern Europe, improving sentiment has supported currency recoveries that were initially hit by the conflict. The Polish zloty, in particular, has rebounded strongly, though its further appreciation may depend more on the geopolitical outlook than on domestic developments. The National Bank of Poland is expected to keep interest rates unchanged, supporting the view of a prolonged pause in policy there.
Overall, markets are navigating a narrow path between optimism tied to signs of de-escalation and caution driven by the risk that the ceasefire proves fragile. That tension is translating into episodic strength for the dollar and renewed volatility among higher-beta currencies, including sterling.