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Secretary of War Pete Hegseth conducts a press briefing on Operation Epic Fury at the Pentagon, Washington, D.C., March 4, 2026. DoW photo by U.S. Navy Petty Officer 1st Class Alexander Kubitza.

Rising bond yields will help the pound, but only as long as equity markets stay calm.

Pound sterling remains relatively resilient against the single currency, with GBP/EUR stabilising just below the 1.15 level following a recovery earlier in the week, while GBP/USD has slipped back to 1.3323 on Thursday as demand for the U.S. dollar persists.

There are still no signs of de-escalation in the conflict involving Iran, the United States and Israel, a backdrop that continues to support the dollar and keep pressure on the euro.

Yet, stable equity markets indicate investors' hope is difficult to extinguish, and any indication that Iran might be willing to negotiate will be latched onto and taken as a reason to buy.

"Despite military strikes in the Middle East continuing and there still being no clarity on the duration of the conflict with Iran, equity indices are a sea of green for the day," says a daily from Lloyds Bank.

Despite pockets of resilience in the market, there's a lingering sense of unease which threatens to topple the cart. The primary source of concern are oil and gas prices which remain elevated: Thursday morning saw the UKMTO Operations Centre report an oil tanker that was anchored offshore Kuwait had been hit by an explosion and is taking on water.

The risks of transporting oil and gas out of the Middle East are therefore exceptionally high and this will effectively block the transit of cargoes to international markets.

"The advance of the Dollar overnight again partially undermines any notion that the equity bounce is built on firm foundations," says Lloyds Bank.

Iranian strikes on U.S. sites in neighbouring Arab states continued overnight and U.S. Defence Secretary Pete Hegseth said in a press conference late Wednesday that the confrontation could last for weeks. "It could be six, it could be eight, it could be three."

Israel’s ambassador to the United Nations, Danny Danon, struck a similarly cautious tone, saying Iran still has "significant capabilities" and that “there’s still a long way to go."

Despite the deteriorating geopolitical backdrop, global equity markets have so far remained relatively calm, showing little sign of panic.

That equity market stability is important for sterling as it allows it to benefit from rising short-term bond yields.

Rising oil and gas prices mean UK inflation will not fall as far as previously expected, and some economists now say the Bank of England will be unable to cut interest rates at all in 2026, which boosts those short-term bond yields that track central bank policy expectations.

As long as global equity markets don't panic, the recovery in bond yields tends to support sterling, which has been the case this week.

"We expect the GBP to recover over the medium term as political clarity emerges post-May elections and the BoE nears the end of its easing cycle," says Constantin Bolz, Strategist at UBS.

The dollar continues to attract demand as energy markets remain under strain.

Matt King of Satori Insights says the greenback is being driven higher primarily by liquidity demand: the USD is simply bid on “money flow” as investors scramble for liquidity while the conflict triggers a rapid unwinding of the “speculative froth” that had buoyed many markets in recent months.

The risks to markets remain elevated as oil and gas prices are still hovering near their highs as export facilities and key shipping routes in the Middle East remain disrupted.

The longer energy prices stay elevated, the greater the potential damage to the global economy and to equity valuations.

Adding to the strain, China has instructed domestic refiners to halt exports of diesel and gasoline after the conflict disrupted crude deliveries.

These developments suggest further stresses could emerge over the coming days.

If tensions persist and energy markets remain tight, stock markets could come under some real pressure as hope gives way to the realities of a protracted war. If equities enter a severe selloff, the pound will get caught up in a major risk-off moment and see losses against the euro and dollar.

"Markets remained focused on geopolitics and energy-driven risk, leaving GBP vulnerable," says Thanim Islam, Head of FX Analysis at Equals Money.