Central Bank Focus This Week
Attention now turns to central bank decisions this week. The Bank of England is expected to keep rates unchanged on Thursday, after the Federal Reserve decision on Wednesday, with markets pricing the Fed to hold at 3.50%–3.75%, alongside a new Summary of Economic Projections. Technically, the near-term tone stays bearish, with price below the 20-period SMA near 1.3325 and the 100-period SMA near 1.3411. RSI has recovered towards 48, moving away from oversold levels. Resistance is seen at 1.3317, with a break pointing to 1.3410–1.3420. Support sits at 1.3284, then 1.3230 if 1.3284 fails. Looking back at the events of 2025, we can see the rebound in GBP/USD to 1.3310 was a temporary relief rally following the US-Iran conflict. That period of tension around the Strait of Hormuz was a critical turning point for energy markets. The initial digestion of the news proved to be overly optimistic, as the situation had longer-term consequences.Lessons For Volatility Positioning
The US strike on Kharg Island last year ultimately triggered a sustained spike in oil prices. Brent crude, which was trading around $85 a barrel before the incident, surged past $115 by the end of that quarter, causing a significant inflation shock globally. Data from the Office for National Statistics later showed UK CPI, heavily influenced by energy costs, climbed over two percentage points faster than in the US during the second half of 2025. This divergence in inflation forced the Bank of England into a more aggressive hiking cycle than the Federal Reserve, which was dealing with a less severe energy shock. While both central banks held rates in the immediate aftermath as the article noted, the BoE was later forced to raise rates by an additional 75 basis points by year-end 2025 to combat Sterling’s weakness and imported inflation. This policy divergence ultimately weighed on the UK’s growth outlook more than the US’s. Today, with GBP/USD trading closer to the 1.2550 level, we can see the long-term fallout from last year’s geopolitical flare-up. The key lesson for us as derivative traders is how quickly implied volatility can re-price. In the weeks following the 2025 strike, one-month implied volatility on GBP/USD options jumped from around 7% to over 12%, rewarding traders who were long volatility. Therefore, going forward, our focus should be on positioning for similar asymmetric risks. Even with current stability, geopolitical flashpoints in energy-producing regions remain a primary threat. We should consider buying cheap, out-of-the-money options on currency pairs sensitive to oil prices, like USD/CAD or USD/NOK, to prepare for another unexpected supply shock. Using strategies like long straddles in GBP/USD can be an effective way to position for a breakout in volatility without betting on a specific direction. The 2025 Kharg Island event demonstrated that the market’s initial reaction is often not the final one. These events introduce sustained periods of uncertainty that are best traded through options rather than spot positions. Create your live VT Markets account and start trading now.
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