Here’s a headline from 6 April 2026: Wells Fargo no longer expects Fed rate cuts in 2026 as Iran war drags on.

On 8 April, Forbes published this: More Interest Rate Cuts Could Happen If Iran War Drags On, Fed Says

Fast forward one week: Gold falls on strong dollar, dimming Fed rate cut hopes

Across the Atlantic, the European Central Bank made the uncontroversial observation that war in Iran has made the monetary policy outlook “significantly more uncertain”.

On the face of it, there’s nothing especially unusual happening here. Events on the ground keep shifting and policymakers need to respond accordingly. And the fact that Federal Open Market Committee was divided on the way forward (common enough for committees deciding monetary policy) is par for the course.

Not just one thing after another

At the same time, we shouldn’t let fast-moving events obscure the deeper reality of rising energy prices and the spectre of stagflation. Oil prices may seesaw between hopes of peace and fears of war, but the underlying dynamic reflects a structural energy price shock in the event that supply disruptions persist or intensify.

The upshot, according to many market commentators, is higher prices and weaker growth, with implications for monetary policy. As a Bank of America letter points out, the “stagflationary shock will have a faster impact on inflation than on growth and we expect monetary policy rates to tighten”.

In Britain, however, we face the mirror image. Analysts had anticipated potential rate hikes from the Bank of England, though the ceasefire agreed between Iran and the United States means markets have moderated those expectations.

The contrast reflects the different starting points of the two economies. The US Fed was already in a holding pattern, debating when to cut, not whether, with war delaying that conversation. The Bank of England, by contrast, had been set to ease amid a weakening economy at the start of the year. In the UK, the energy shock has switched the policy lever in opposite direction entirely: from imminent cuts to the prospect of hikes.

Shifting logic

But even with that perspective in mind, the way forward is far from clear. The challenge is not everyday uncertainty about events. It’s that stagflation poses a uniquely complex challenge for central bankers. The usual logic is straightforward: rising prices call for higher rates; slowing growth argues for cuts. Stagflation upends that framework, forcing policymakers to choose the least bad option, even as the roots of the problem lie well beyond monetary policy itself. That is why rate decisions in the months ahead will be unusually hard to make, and harder still to predict.

In this environment, FX markets are left without a clear direction, reacting to headlines on war, energy and rhetoric from the White House because the usual rate signals no longer point clearly one way.

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