GBP/USD extended last week’s sharp falls and stayed under selling pressure for a fifth day on Monday. It fell to about 1.3300 in Asia, its lowest level since 8 April, as the US dollar strengthened.
Markets have increased bets on a Federal Reserve rate rise in 2026, while tensions in the Middle East supported demand for the dollar. Donald Trump warned Iran that the “clock is ticking”, and the Times of Israel reported on Saturday that Israel and the US are advancing military preparations for possible renewed coordinated attacks on Iran.
Disputes over Iran’s nuclear programme and the Strait of Hormuz reduced expectations of a deal and pushed oil to a two-week high. This added to inflation concerns, and CME FedWatch showed traders pricing over a 50% chance of a Fed rate rise by year-end, supporting US yields and the dollar.
Sterling also faced pressure from UK political uncertainty after Labour’s heavy local election losses and calls for Prime Minister Sir Keir Starmer to step down. The week ahead includes UK employment data on Tuesday and inflation figures on Wednesday, which may affect Bank of England rate expectations.
The pound dates to 886 AD and accounts for 12% of global FX trading, about $630 billion a day (2022). Key pairs are GBP/USD (11%), GBP/JPY (3%), and EUR/GBP (2%), and BoE policy targets inflation of around 2%.
Given the sustained fall of GBP/USD to the 1.3300 level, we see a clear bearish trend driven by a strengthening dollar. The 10-year US Treasury yield is holding firm above 4.75%, a level not seen since late 2025, which continues to attract capital to the US. This environment suggests that any short-term bounces in the pound are likely selling opportunities.
The dollar’s strength is fueled by geopolitical fears in the Middle East and stubbornly high oil prices, with WTI crude now trading over $95 a barrel for the first time this year. These factors are solidifying expectations for a hawkish Federal Reserve, as the latest CME FedWatch Tool data now shows a 62% probability of at least one rate hike by the end of 2026. Traders should therefore anticipate the dollar to remain the favored safe-haven currency in the coming weeks.
On the other side of the pair, the British pound is being undermined by significant political instability. A recent YouGov poll shows Prime Minister Starmer’s approval rating has collapsed to 28% following poor local election results, and last week’s resignation of a key minister points to a fractured government. This political risk is a major headwind for Sterling and will likely deter foreign investment.
Looking back at the political turmoil we experienced in 2025 after the general election, we saw how cabinet instability can directly lead to a 2-3% drop in the pound’s value over a short period. The current situation feels similar, suggesting historical precedent for further sterling weakness. We must remain cautious, as political headlines could cause sudden and sharp moves in the currency.
This week’s UK economic data presents a critical test, with traders focused on Tuesday’s employment figures and Wednesday’s inflation report. Consensus forecasts point to a slight rise in unemployment to 4.5% and for core inflation to remain elevated at 3.1%, putting the Bank of England in a difficult position. High inflation would normally support the pound, but a weakening labor market and political chaos may force the BoE to stay its hand.
For derivative traders, this outlook supports strategies that profit from a falling GBP/USD and increased volatility. Buying put options on the pound offers a way to speculate on further downside while limiting risk ahead of this week’s key data releases. Alternatively, establishing short positions through futures contracts could be considered, but traders must be prepared for volatility surrounding the UK inflation numbers.
