GBP/USD Jumps on First Hints of BOE Rate Hike

Sterling rallied against the US dollar, as well as the euro on Thursday after a surprise hawkish turn by the Bank of England, which raised the possibility of a UK rate hike if the war in Iran were to increase inflationary pressures. Simultaneously the FTSE 100 slumped back to the 10k mark, matching a decline on Wall Street as investors turned risk-off.

Equities

The FTSE 100 fell 2.4% on Thursday to its lowest closing level in about two months, while the FTSE 250 also dropped 2.4% and touched its weakest level since November. London stocks stayed under pressure after the Bank of England left interest rates unchanged in a unanimous decision on Thursday and warned that the war in the Middle East could add to inflation risks.

Among the best-known UK stocks, BP closed 4.9% higher on Thursday, making it one of the few clear gainers in the blue-chip index. The move came after the oil major agreed to sell its Gelsenkirchen refinery to Klesch Group and lifted its cost-cutting target, while stronger crude prices also supported the shares.

HSBC fell 3.1% by the close in London on Thursday after Bloomberg reported that the bank is considering cutting up to 20,000 jobs. Banks were broadly weak across the session, with the FTSE banking sector down 4.3%, adding to the pressure on the wider index.

Mining shares were hit harder still, with the metal miners sector ending Thursday down 7.8%. Across the FTSE 100, 97 of the index’s 100 constituents finished in the red, showing how broad the selling was by the close.

In the US, the S&P 500 closed 0.27% lower on Thursday at 6,606.49, the Nasdaq slipped 0.28% to 22,090.69, and the Dow Jones Industrial Average fell 0.44% to 46,021.43. By the end of trading in New York, all three indices were sitting below their 200-day moving averages, while the S&P 500 was down more than 3% for 2026 and trading around four-month lows.

Tesla closed 3.2% lower on Thursday after the National Highway Traffic Safety Administration stepped up its investigation into 3.2 million Tesla vehicles equipped with Full Self-Driving driver-assistance software. The concern is whether the system may fail to detect or warn drivers properly in poor visibility.

Micron Technology fell 3.8% by the close after its quarterly forecast failed to satisfy investors, despite strong enthusiasm around AI-related demand earlier this year. Nvidia also ended Thursday lower, down 1%.

Forex & Commodities

Early on Friday, the US dollar was off recent lows but remains softer on the week, with the dollar index at 99.35. The euro was a little lower on Friday at $1.157, while sterling held near $1.342 and the yen traded around 158.5 per dollar, with all three currencies heading for weekly gains against the dollar.

Sterling drew support after the Bank of England kept interest rates unchanged on Thursday but signalled that it was prepared to respond if higher energy costs push inflation further. Markets are now leaning towards further tightening later this year, a sharp change from expectations before the conflict in the Middle East escalated.

The euro also remained firm over the week after the European Central Bank left rates unchanged on Thursday and warned about inflation risks linked to higher energy prices. Reuters reported that policymakers are likely to begin discussing rate rises next month, while some banks think an increase could come as soon as the next meeting.

The yen strengthened through the week after the Bank of Japan kept rates on hold earlier on Thursday but left the door open to a possible rise as soon as April. The Australian dollar also moved higher this week, trading just below $0.7100 on Friday after the Reserve Bank of Australia raised rates for a second straight month.

Spot gold rose on Friday to $4,675 after falling to a near two-month low in the previous session. Even with Friday’s rebound, gold remained on course for a third straight weekly decline, with analysts pointing to weaker appetite for non-yielding assets as rate expectations stayed firm.

Oil prices moved higher again on Friday, although they were below Thursday’s intraday peaks. Brent crude traded at $109.9 and US WTI crude at $96.20, as traders weighed fresh attacks between Israel and Iran, efforts to protect shipping through the Strait of Hormuz, and possible steps by Washington to boost supply, including the lifting of sanctions on ‘at sea’ Iranian oil.