Pound Sterling Posts Strongest Weekly Rally in Three Months on Ceasefire Optimism

The British pound edged lower on Friday but remained on track for its strongest weekly performance in three months, buoyed by growing market optimism over a potential ceasefire between the United States and Iran.

Sterling slipped 0.15% to trade at $1.342, trimming earlier gains. Despite the dip, the currency is still up roughly 1.7% for the week, its best showing since mid-January, highlighting a sharp shift in investor sentiment as geopolitical tensions show tentative signs of easing.

Markets rallied earlier in the week after U.S. President Donald Trump announced a proposed two-week ceasefire agreement, which includes the reopening of the Strait of Hormuz, a critical energy transit chokepoint through which nearly 20% of global oil and liquefied natural gas shipments pass. The development helped calm fears of a prolonged disruption to energy supplies that had driven prices sharply higher and threatened global growth.

However, the truce appeared fragile heading into Friday. Ahead of expected talks in Pakistan, Trump criticized Iran’s handling of oil transit through the strait, while Israeli military activity in Lebanon underscored the region’s continued volatility.

Sterling’s recent rebound follows a turbulent period. Since the onset of hostilities between Washington and Tehran in late February, the pound has lost around 0.4%, reflecting the UK’s vulnerability to rising energy costs due to its reliance on imports. In March alone, the currency dropped 1.9% against the dollar as investors sought safety in the greenback amid escalating tensions and market uncertainty.

Other major currencies have also felt the strain. The euro has declined approximately 1.1% since the conflict began, while the Japanese yen has fallen around 2%, as shifting risk appetite reshaped global currency flows.

Meanwhile, the U.S. dollar index is heading for its steepest weekly decline since mid-January, as investors rotate back into equities, bonds, and higher-yielding currencies in response to easing geopolitical risks.

The euro held steady against the pound on Friday at 87.06 pence, down about 0.7% since the conflict erupted. Traders remain focused on assessing which economies are most exposed to ongoing instability, with energy dependency emerging as a key factor influencing currency resilience.

As diplomatic efforts continue, markets are likely to remain sensitive to headlines, with any signs of a durable agreement potentially extending sterling’s recovery, while renewed tensions could quickly reverse recent gains.