GBP fell 1.9% in March after the start of Operation Epic Fury, compared with a 2.2% fall in EUR and a 3.8% fall in CHF. In April, GBP rose 2.9%, ahead of CHF at 2.3% and EUR at 1.5%.
In the first half of May, GBP fell 0.6%, while EUR fell 0.2% and CHF fell 0.1%. Attention has shifted from the US-Iran conflict to UK political risk and changing expectations for Bank of England rate rises.
The GBP outlook is linked to whether the Iran conflict escalates or eases, due to the effect on USD strength. UK politics tends to drive GBP moves when fiscal concerns rise sharply, such as during Liz Truss’s 2022 mini-budget episode.
The article says GBP has kept most of its gains since Operation Epic Fury, unlike EUR and CHF. It also states the piece was produced using an AI tool and checked by an editor.
The Pound’s strong performance from March and April is now giving way to political risk as we move through mid-May. We see that GBP has underperformed both the Euro and the Swiss Franc this month, with the GBP/USD exchange rate falling from a high of 1.28 to near 1.25 in just two weeks. This shift shows the market is now more concerned with events at 10 Downing Street than the after-effects of Operation Epic Fury.
This political instability is causing traders to doubt the Bank of England’s ability to continue hiking interest rates. While recent UK inflation data for April came in at a persistent 3.1%, expectations for future rate hikes have been scaled back, with markets now pricing in a less aggressive path for the remainder of 2026. This is a stark contrast to the hawkish sentiment that helped support the Pound a month ago.
For derivative traders, this growing uncertainty suggests an increase in volatility, which we can already see with one-month GBP/USD implied volatility rising from 7% to over 9% since May began. This environment is ideal for strategies that profit from large price swings, such as buying straddles or strangles. This allows a trader to capitalize on a significant move in the Pound without having to correctly guess the direction.
We must remember the lesson from the 2022 mini-budget crisis, when political turmoil directly threatened the UK’s fiscal stability and caused a massive sell-off in the Pound. While the current political issues are concerning, they have not yet reached that crisis level, which is why the Pound has not completely erased its post-conflict gains. The key is to watch if the political risk begins to translate into a fiscal one.
Ultimately, the Pound’s outlook is still heavily influenced by the strength of the US dollar, which is being driven by the escalation or resolution of the Iran conflict. A major development in that situation could easily overshadow domestic UK politics and drive the next big move in the currency. Therefore, any position on the Pound should be hedged against or informed by the outlook for the dollar.
