GBP/USD dipped to about 1.3380, then recovered to around 1.3510, up 0.35% on the day. It has risen more than 350 pips from near 1.3160 in early April, and has retraced roughly half of the drop from about 1.3870.
A US blockade of the Strait of Hormuz after failed peace talks in Pakistan weighed on risk appetite early on Monday. Later, the US Dollar eased as markets anticipated a possible resolution, helping GBP/USD to regain 1.3500.
Tuesday brings the March US Producer Price Index (PPI), expected at 1.2% month-on-month versus 0.7% in February. The year-on-year PPI is forecast at 4.6% versus 3.4%, alongside five Federal Reserve speeches from Goolsbee, Barr, Barkin, Collins, and Paulson.
UK CPI is expected to rise to between 3% and 3.5% over coming quarters due to higher fuel and utility costs. This follows a prior move towards the 2% target before the conflict.
GBP/USD trades near 1.3513, above the 50-day EMA at 1.3395 and the 200-day EMA at 1.3367. Stochastic RSI is near 71, with support levels around 1.3395 and 1.3367.
We remember watching the pound recover to 1.3500 in April 2025, even as the US blockade of the Strait of Hormuz began. That market optimism about a quick resolution proved temporary, as the stagflationary risks discussed at the time took hold and weighed on the UK economy throughout the past year. Today, with GBP/USD hovering near 1.2850, our focus has shifted from geopolitical hope to the hard reality of stubborn inflation.
The inflation shock from the 2025 conflict has left a long tail that we are still managing. The latest March Consumer Price Index data showed US inflation remains sticky at 3.1%, while the UK’s figure came in at 3.2%, both stubbornly above the 2% target. Consequently, both the Federal Reserve and the Bank of England have signaled that the rate cuts we had anticipated for this quarter are likely delayed.
Tensions in the Strait of Hormuz have eased from the direct blockade of 2025, but they have not disappeared, with sporadic shipping disruptions still a concern. This persistent risk keeps a floor under energy prices, with Brent crude recently trading back above $92 a barrel. This complicates the path back to lower inflation and keeps the risk of another price spike in our minds.
Given this backdrop of sticky inflation and central bank hesitation, we should position for continued range-bound trading marked by sharp bursts of volatility. Using options to buy straddles or strangles ahead of key inflation reports could be a good way to play the expected price swings. This allows us to profit from a significant move in either direction without having to guess the outcome of finely balanced policy decisions.
For those of us who believe the UK’s economic challenges will ultimately limit the pound’s upside near the 1.3000 level, selling out-of-the-money call options on GBP/USD offers a way to generate income. On the other hand, with the market highly sensitive to any shift from the Fed, buying short-dated puts can serve as a cost-effective hedge. This protects against any hawkish surprises that could send the dollar sharply higher and push the pound back toward its yearly lows.
