GBP/USD fell for a third consecutive day in Friday’s Asian session, slipping below 1.3200 to its lowest level since April. The pair is set for heavy weekly losses, with price action still pointing lower after a weekly swing high near 1.3460.
Sterling remained under pressure as domestic political risk persisted after Greater Manchester Mayor Andy Burnham won a parliamentary seat in northern England on Friday, opening a route to challenge Prime Minister Keir Starmer. Rate expectations also shifted: markets pared bets on more aggressive Bank of England hikes after softer inflation earlier in the week, while the US-Iran peace deal reduced energy-shock fears and reinforced assumptions the BoE will keep rates steady. The dollar held near its highest level since late March as the Federal Reserve maintained a more hawkish tilt, indicating the possibility of at least one rate hike by year-end.
Geopolitical uncertainty added support for the USD after US Vice President JD Vance cancelled a planned Switzerland trip for Iran talks, citing the meeting was not yet finalised. Israeli air strikes in Lebanon also raised doubts over the US-Iran deal, while attention turns to UK monthly Retail Sales data as the next catalyst.
Political Instability And Monetary Policy Divergence Pressuring Sterling
Given the persistent weakness in GBP/USD, we believe the path of least resistance is lower in the weeks ahead. The political turmoil in the UK is a significant factor, with recent YouGov polls showing Prime Minister Starmer’s approval rating falling to a new low of 28% amid the leadership challenge. This instability makes it difficult to build any long-term bullish case for the British pound.
The divergence in central bank policy is becoming more pronounced and supports a weaker sterling. With the latest ONS data showing UK inflation falling to 2.1%, the Bank of England is expected to remain on hold, while the CME FedWatch tool now shows a greater than 70% probability of a Fed rate hike by September. This interest rate differential will likely continue to attract capital towards the US dollar.
Bearish Trading Strategies And Geopolitical Risk Favour USD
For derivative traders, this environment suggests that buying put options on GBP/USD could be a prudent strategy to profit from further downside. The options market is already reflecting this sentiment, with one-month risk reversals showing a strong and growing bias for puts over calls. Any short-term rally towards the 1.3250 area should be viewed as an opportunity to initiate fresh bearish positions.
Geopolitical tensions are also bolstering the safe-haven appeal of the US dollar, adding another layer of pressure on the cable. The CBOE Volatility Index (VIX) has climbed over 15% this week to trade above 19, reflecting rising market anxiety over the US-Iran deal and Israeli military action. As long as this uncertainty persists, the dollar is likely to remain well-supported.
We are now watching for a decisive break below the 1.3150 level, which could open the door for a test of the key psychological support at 1.3000. The upcoming UK Retail Sales figures will be the next major catalyst for the pair. A weak reading would reinforce the negative outlook and likely accelerate the move lower.
