GBP/USD gave back modest prior-day gains and traded around 1.3400 in Asian hours on Tuesday as the US Dollar found support from caution over further updates on US–Iran talks. With no official agreement text released by Washington or Tehran, major shipping lines have delayed rerouting vessels through the Strait of Hormuz until there is fuller transparency, keeping broader positioning restrained.
The pair had started the week with a risk-on jump to about 1.3450 after a reported ceasefire and the reopening of Hormuz pushed Crude Oil lower and lifted risk-sensitive currencies, but the move later reversed to roughly 1.3400. The framework underpinning the shift is described as preliminary, featuring a 60-day ceasefire extension, Iran’s nuclear programme deferred to subsequent negotiations, and a formal signing pencilled in for Friday. Crude Oil fell close to 5%, while the wider market response was more moderate, with much of the buying said to have occurred last week, and attention turning to Wednesday’s Federal Reserve meeting.
Market Skepticism and Volatility Expectations
We are seeing the pound’s rally on the US-Iran deal news completely reverse, which tells us the market is skeptical. The relief from falling oil prices was temporary, and focus is now shifting to the US Dollar ahead of the Federal Reserve meeting. This failed rally from 1.3450 back to 1.3400 is a clear sign of underlying dollar strength.
The uncertainty surrounding the ceasefire’s fine print and the upcoming Fed decision means we expect volatility to increase. In fact, one-month implied volatility on GBP/USD options has already climbed to 8.5% from around 7% last week, pricing in larger price swings. We believe strategies that profit from this chop, or a sharp downward move, are now more attractive.
Policy Divergence, Dollar Strength, and Trading Strategies
Supporting a stronger dollar, the latest US CPI data came in at a slightly higher-than-expected 3.5%, reinforcing the view that the Fed will not be in a hurry to cut rates. The market is now pricing in an 85% probability that the Fed will hold rates steady this week and maintain a hawkish tone. This contrasts with recent UK inflation figures, which at 2.1% are much closer to the Bank of England’s target, giving them room to be more dovish.
This policy divergence is a key reason we see a path for GBP/USD to move lower in the coming weeks. We are looking at the 2022-2023 period when aggressive Fed policy drove significant dollar strength as a historical guide for what could happen next. Therefore, we see value in buying put options to position for a potential slide below the 1.3300 support level.
However, we must remain aware of the geopolitical risks tied to the Iran deal. While the initial market reaction has faded, a formal signing on Friday or concrete steps to reopen the Strait of Hormuz could cause another short-lived, risk-on rally. We are treating any upward spikes as opportunities to build our bearish positions at better prices.
