GBP/USD rose on Friday as risk appetite improved ahead of planned US-Iran talks in Pakistan. The pair traded at 1.3461, up 0.20%.
US CPI rose 3.3% year on year in March, in line with forecasts and up from 2.4% in February. Core inflation rose from 2.5% to 2.6%, below the 2.7% estimate.
Dollar Reaction And Sentiment
After the data, the US Dollar Index fell 0.13% to 98.66, near four-week lows. The University of Michigan sentiment index dropped to 47.6 in April from 53.3, versus a 52 forecast.
The survey cited higher energy costs, with petrol at $4 per gallon. One-year inflation expectations rose from 3.8% to 4.8%, and five-year expectations rose from 3.2% to 3.4%.
UK rate pricing showed 2026 tightening expectations rising from 32 to 42 basis points, based on LSEG data. The coming week includes UK Retail Sales and GDP, plus US housing data, PPI, jobs figures, and central bank speakers.
On the chart, GBP/USD stayed above the 50-, 100- and 200-day SMAs near 1.3435. Support is also noted near 1.3035, while resistance is linked to a descending line from about 1.3869.
Given the improved risk appetite stemming from the US-Iran talks, we should position for further GBP/USD strength. The market is clearly looking past the high headline inflation in the US, focusing instead on the softer core reading as a sign that price pressures are contained to energy. This suggests that positive news from the peace negotiations in Pakistan could push the pair higher in the near term.
Geopolitical Risk And Hedging
We see the primary driver as geopolitical de-escalation, which could cause a significant drop in energy prices. Recent trading in WTI crude futures supports this, with the June contract already pulling back from over $110 to near $102 a barrel in anticipation of a potential ceasefire agreement. Looking back at how oil prices reacted to the 2015 Iran nuclear framework, we could see a further 10-15% drop in crude if a deal is formalized, which would strengthen the case for a lower US dollar.
However, the risk of the talks collapsing is significant and must be hedged. US consumer sentiment is at a record low precisely because of high gas prices, so a negative outcome would likely cause a sharp risk-off move, strengthening the dollar. We should consider buying cheap, out-of-the-money GBP/USD put options with a strike below the key 1.3435 support level to protect against a sudden reversal.
The growing policy divergence between the Bank of England and the Federal Reserve provides a strong underlying support for sterling. As we saw during late 2025, the BoE has shown a tendency to be more hawkish than markets expect, and with expectations for 42 basis points of hikes growing, this trend continues. This fundamental backdrop makes being long GBP a more comfortable position, even if geopolitical optimism fades slightly.
Considering the binary nature of the geopolitical situation, we should keep a close eye on implied volatility in the options market. The Cboe FX Volatility Index for the pound has likely risen, reflecting the uncertainty around the talks. If we gain strong conviction that a deal is imminent, selling some of this elevated volatility through option strategies could be profitable as certainty returns to the market.
