An End to the US–Iran Conflict Won’t Bring FX Stability Back Any Time Soon

Fragile Peace, Persistent Volatility

As the two-week ceasefire between the US and Iran nears its end, expectations for a durable resolution remain low. Even in a best-case scenario, where negotiations yield a workable agreement that satisfies both sides, the foreign exchange market is unlikely to revert quickly to pre-conflict dynamics. The legacy of disrupted energy flows, fragile geopolitics, and policy uncertainty points instead to a prolonged period of volatility.

Policy Noise and Market Whiplash

At the heart of the issue is credibility. Markets have been repeatedly whipsawed by conflicting signals from both sides, particularly from the US, where policy communication has lacked consistency. Announcements regarding the status of the Strait of Hormuz—a critical artery for global energy supply—have been made and reversed within days, sometimes hours. For FX markets, this has translated into sharp but short-lived moves, as traders respond to headlines only to retrace positions when expectations prove premature.

Even if a ceasefire evolves into a broader agreement, the first hurdle will be compliance. Trust between the US and Iran is minimal, and enforcement mechanisms appear weak. Iran’s fragmented command structure raises further doubts about its ability to guarantee adherence on the ground, particularly in ensuring safe passage through the Strait. From a market perspective, this implies that geopolitical risk premia will not dissipate quickly. Instead, they are likely to remain embedded in asset prices, including currencies.

For sterling, this was modestly supportive. Markets tend to reward fiscal discipline and punish uncertainty. A stable fiscal backdrop reduces the risk premium embedded in UK assets — and, by extension, the pound.

However, beneath the surface, the picture was less reassuring.

The Long Tail of Energy Disruption

This persistence of risk is most clearly transmitted through the energy channel. Months of disruption in the Strait of Hormuz will not be resolved overnight. Shipping backlogs, dislocated vessels, and port congestion will take time to unwind. Moreover, oil and gas production cannot simply be switched back on. Even in the absence of physical damage (of which there is plenty), restoring output is a gradual process, and an immense engineering challenge.

As a result, any increase in supply is likely to be incremental rather than immediate. Oil prices, therefore, are set to remain elevated relative to pre-conflict levels for an extended period. Beyond energy, the disruption to fertiliser exports—where the region accounts for around 30% of global supply—poses additional upside risks to food prices and global inflation as the next harvest season could produce significantly lower yields.

A Stagflationary Undercurrent and Asymmetric Risks

For FX markets, this creates a familiar but complex macro backdrop: a negative supply shock that raises inflation while dampening growth. The implications for major currencies are neither straightforward nor symmetric.

The US dollar would typically benefit from such an environment, given its safe-haven status and the potential for a more hawkish Federal Reserve response. However, the current episode is more nuanced. Policy volatility and inconsistent communication from US authorities have undermined confidence, limiting the dollar’s upside. This is not to mention other major controversies surrounding tariffs, immigration enforcement, and central bank independence, which have also gone some way toward undermining the reputation of the US and its institutions. While the greenback may still attract flows during acute risk-off episodes, its ability to sustain gains is likely to be curtailed by questions around policy credibility.

By contrast, the euro and the pound appear more structurally exposed to the downside. Both the Eurozone and the UK are more sensitive to energy price shocks, given their reliance on imported energy. Prolonged elevated oil and gas prices are therefore likely to weigh more heavily on growth prospects in these economies than in the US.

At the same time, fiscal responses in Europe and the UK—such as subsidies and tax cuts aimed at cushioning consumers—risk stretching public finances. With governments already facing increased demands for defence and infrastructure spending, this could lead to higher sovereign borrowing costs. Any erosion of market confidence in fiscal sustainability would represent an additional headwind for both currencies.

Central Banks in a Policy Bind

Monetary policy adds another layer of uncertainty. Central banks are confronted with an acute trade-off: tighten policy to contain inflation, or support growth in the face of a negative supply shock. This dilemma is particularly challenging given that the inflationary impulse is concentrated in highly visible categories such as energy and food. These are precisely the components most likely to influence inflation expectations in the medium term and trigger second-round price effects that are hard to unwind.

For currency markets, the key question is not simply the direction of policy, but its perceived adequacy. A central bank that is seen as falling behind the curve risks currency depreciation, while overly aggressive tightening could exacerbate growth concerns and prove equally destabilising. In this environment relative policy credibility, rather than absolute policy settings, may become the dominant driver of FX performance.

Crucially, this suggests that even if the geopolitical situation stabilises, FX volatility may persist. Markets are likely to remain highly sensitive to incoming data, policy signals, and geopolitical developments. Headline-driven trading, already a defining feature of recent weeks, could continue to dominate in the absence of clear and credible policy frameworks.

The net result is rising uncertainty, and currencies tend to dislike uncertainty.

A Crucial Test for Policy Credibility

The upcoming convergence of central bank meetings at the end of April —effectively a “Super Week” for global monetary policy—will therefore be a critical test. The Federal Reserve, the European Central Bank, and the Bank of England will each need to articulate how they intend to navigate the competing pressures of inflation and growth. Their respective communication strategies may prove as important as their policy decisions in shaping market outcomes.

Ultimately, the end of active conflict, should it come, will not mark a return to normality for financial markets. Instead, it will signal the beginning of a more complex phase, characterised by lingering supply disruptions, elevated inflation, and uncertain policy responses. In such an environment, currency performance is likely to be driven less by traditional fundamentals and more by relative credibility—of governments, central banks, and the geopolitical landscape itself.

• But weaker growth prospects, rising fiscal pressures and heightened geopolitical risk weigh in the opposite direction.

Much will depend on the duration of energy market disruption and how credibly the government can maintain fiscal discipline in a more hostile global environment.

What is clear is that the relative calm the Chancellor sought to project has been overtaken by events. For businesses with FX exposure, this is precisely the kind of environment where proactive risk management becomes critical. The coming months are likely to bring heightened volatility — and sterling will be one of the currencies most sensitive to how this global story unfolds.