Sterling slipped for a second day against the US Dollar, with GBP/USD around 1.3429 as shifting sentiment on US-Iran talks lifted the Greenback. Iran’s State TV reported an initial unofficial framework for a memorandum of understanding (MOU), before the United States rejected the claim as “a complete fabrication”, prompting the Dollar to reverse earlier intraday losses. The US Dollar Index (DXY) traded near 99.20 after briefly dipping below 99.00 in the European session.
Attention remains on negotiations over Iran’s nuclear programme and the Strait of Hormuz, with US President Donald Trump due to discuss the issue in a Wednesday cabinet meeting. With the strait not fully reopened, oil prices are expected to stay elevated, pushing US inflation further from the Federal Reserve’s 2% target and reinforcing expectations for a restrictive stance, including a possible year-end rate rise per the CME FedWatch Tool. In the UK, softer inflation and labour data have prompted markets to scale back Bank of England (BoE) tightening expectations from two to three hikes by year-end, while traders await US PCE inflation data and remarks from Fed officials.
Geopolitical Tensions Pressure the Pound
We see the British Pound continuing to struggle against the US Dollar due to ongoing geopolitical tensions. The market’s cautious mood, driven by uncertainty in the US-Iran negotiations, is boosting the dollar’s appeal as a safe-haven asset. This puts direct pressure on the GBP/USD exchange rate.
The US Dollar Index (DXY) reflects this sentiment, holding strong around 104.6 this week, which is significantly higher than levels seen in previous years. Historically, periods of heightened conflict in the Middle East have consistently led to a stronger dollar as capital seeks safety. We expect this trend to persist as long as diplomatic uncertainty remains a key market theme.
Elevated energy prices, with WTI crude oil currently trading near $79 per barrel, are keeping US inflation concerns at the forefront. The latest Consumer Price Index (CPI) data shows inflation at 3.4% year-over-year, still well above the Federal Reserve’s 2% target. This situation reinforces the view that the Fed will not be in a rush to lower interest rates.
Diverging Central Bank Outlooks and GBP/USD Strategy
Based on this, we believe the Federal Reserve will maintain its restrictive policy stance for longer than previously anticipated. The CME FedWatch Tool shows that traders are now pricing in only one potential rate cut by the end of 2026, a significant shift from earlier expectations. This outlook provides a strong fundamental support for the US Dollar.
In contrast, the UK’s economic data is painting a softer picture. With UK inflation recently falling to 2.3% and signs of a cooling labor market, the Bank of England is facing less pressure to keep rates high. This divergence in central bank policy is a key driver of weakness for the Pound.
For the coming weeks, we are positioning for further downside in GBP/USD. We are looking at buying put options to capitalize on a potential drop below the 1.3400 level. This strategy allows us to define our risk while maintaining exposure to the bearish trend we foresee.
