GBP/USD rose by over 0.20% on Tuesday and traded around 1.3241 as early ceasefire hopes supported market mood. Reports later said a deal was far off, raising concern about possible US action as Donald Trump’s deadline nears.
Risk appetite weakened as the Middle East conflict escalated and oil prices rose. The US Dollar Index (DXY) fell 0.14% to 99.84, despite the usual link between the Dollar and WTI.
Reports said the US attacked Kharg Island and Iran responded against US interests in the United Arab Emirates, Iraq and Saudi Arabia. Other reports said US–Iran talks were closed, while the Tehran Times said the channels were not closed.
US Durable Goods Orders fell 1.4% in February, worse than the 0.5% fall expected, while core goods rose 0.8% month on month. New York Fed President John Williams said an energy shock could lift inflation, with inflation expected to rise by 2.75% this year.
The New York Fed survey showed one-year inflation expectations at 3.4% (from 3%), three-year at 3.1% (from 3%), and five-year at 3%. In the UK, S&P Global Services PMI dropped from 53.9 to 50.5, and input prices rose.
Looking back to 2025, we saw the market grapple with Middle East tensions and rising oil prices, which clouded the outlook for Sterling. Initial hopes for a ceasefire provided a brief lift, but the underlying concerns were weak UK economic data pointing towards stagflation. This created a difficult environment where risk sentiment could shift rapidly.
Today, those stagflation fears from last year have become a more persistent reality, as the latest UK CPI data for March 2026 shows inflation remaining stubbornly high at 3.5%, well above the Bank of England’s target. The UK Services PMI has also dipped into contraction territory, coming in at 49.2, confirming a significant slowdown in the economy. This economic weakness makes it difficult for the Bank of England to maintain its current hawkish stance without causing a deeper recession.
In contrast, the US has managed its inflationary pressures more effectively after the energy shock of 2025. With the Federal Reserve holding rates firm at 5.75%, US core inflation has cooled to 2.9%, giving the US Dollar a fundamental yield advantage over the Pound. The economic divergence we began to see last year has now widened considerably, favoring USD strength.
Reflecting on the technical picture from 2025, the failure to break above the 1.3500 resistance level proved to be a critical turning point for the pound. The subsequent break below the rising trendline support near 1.3100 confirmed that sellers had taken decisive control of the market. This breakdown set the stage for the sustained downtrend that has brought us to the current price levels.
Given this backdrop, we should consider strategies that benefit from further GBP weakness or limited upside over the next several weeks. Buying GBP/USD put options with May or June 2026 expiries offers a clear way to position for a continued decline toward the 1.2000 psychological level. Alternatively, selling out-of-the-money call spreads provides a higher probability way to profit if Sterling remains capped below key resistance, such as 1.2450.
