GBP/USD rose to about 1.3430 in early Asian trading on Wednesday, supported by expectations of an easing in Middle East tensions. Sentiment could turn more guarded later in the day ahead of the UK Consumer Price Index (CPI) release and the US Federal Reserve (Fed) rate decision.
The Wall Street Journal reported that an initial US-Iran deal is due to be signed on Friday, followed by two months of final negotiations. US President Donald Trump said the Strait of Hormuz could reopen on Friday, while Washington would allow Iran to resume selling oil and fuel immediately. In the US, the Fed is expected to hold rates at 3.5% to 3.75% at its June meeting, with attention on new chairman Kevin Warsh’s press conference. In the UK, the Bank of England (BoE) is seen keeping Bank Rate at 3.75% on Thursday; futures pricing has shifted from as many as three BoE hikes to expectations of no change, according to Morningstar.
Impact of Middle East Developments and Major Central Bank Decisions
We’re seeing GBP/USD gather strength around 1.2850, lifted by hopes of a Middle East peace deal similar to the one being discussed. This optimism could be short-lived, however, as we brace for the upcoming UK inflation data and the US Federal Reserve’s policy announcement. The focus on these key economic events will likely introduce volatility.
A potential deal that allows for the reopening of the Strait of Hormuz and the resumption of Iranian oil sales would significantly lower energy prices. Historically, such de-escalations tend to boost riskier currencies like the pound against the dollar. We saw a similar dynamic around the 2015 nuclear deal, where risk sentiment improved even if other factors were at play.
Prospects for Monetary Policy and Trading Strategies
On the US side, we expect the Federal Reserve to hold its benchmark rate steady in the 4.50% to 4.75% range. Recent data from the Bureau of Labor Statistics shows US inflation has cooled to 2.5%, giving the Fed room to maintain a less aggressive stance. This policy divergence could weigh on the US dollar.
The Bank of England is also expected to leave its rate unchanged at 5.00%, but for different reasons. The latest ONS figures show UK inflation remains stubbornly high at 2.8%, well above the 2% target, creating a dilemma for policymakers. Consequently, derivatives markets have shifted from pricing in further rate hikes to anticipating a prolonged pause.
Given the binary risks ahead, we believe the best approach is to trade the expected volatility rather than picking a direction. An impending peace deal could send GBP/USD sharply higher, while a hawkish surprise from the Bank of England could do the same. We would consider buying option strangles to profit from a significant price move in either direction over the coming weeks.
