The Pound (GBP) gave up early gains against the US Dollar (USD) on Monday, extending a fall from Friday’s peak above 1.3650 to lows below 1.3550. Rising tensions in the Middle East increased demand for the safe-haven USD.
Iran’s Fars news agency reported that two missiles hit a US warship after it ignored an Iranian warning and aimed to pass through the Strait of Hormuz. The report pushed oil prices and the USD higher.
Strait Of Hormuz Tensions
The moves followed an announcement by US President Donald Trump of a plan to free vessels stranded in Hormuz, due to start on Monday. The plan was announced without detailed operational information.
Tehran warned that any US military incursion into Iranian waters would be treated as a ceasefire breach and would be met with “full strength.” The warning added to risk-averse trading.
In the UK, Monday’s economic calendar is light. In the US, March Factory Orders and a speech by New York Fed President John Williams are scheduled.
Later in the week, the US ADP Employment Change is due on Wednesday, with Nonfarm Payrolls (NFP) on Friday. More Federal Reserve speakers are also due across the week.
Key Market Drivers Ahead
We are reminded of how geopolitical shocks, like the US-Iran tensions in the Strait of Hormuz during 2025, can rapidly shift market sentiment. That incident sent investors fleeing to the safety of the US Dollar, causing GBP/USD to drop sharply. This fundamental pattern of risk-aversion boosting the dollar remains a key consideration for us today.
Currently, similar tensions are contributing to market volatility, with ongoing shipping disruptions in the Red Sea keeping oil prices elevated. Brent crude has been trading above $90 a barrel for the last month, a significant increase from the low $80s we saw at the start of the year. This persistent uncertainty provides a strong underlying bid for safe-haven assets like the dollar.
The US economy continues to show resilience, further supporting the dollar’s strength. Last week’s Nonfarm Payrolls report for April 2026 showed a robust addition of 240,000 jobs, while the latest CPI data revealed inflation remains sticky at 3.1%. This strong data makes it unlikely the Federal Reserve will consider cutting interest rates anytime soon.
In contrast, the UK’s economic picture is less clear, which weighs on the Pound. First-quarter GDP growth for 2026 was a sluggish 0.1%, and recent Bank of England commentary has hinted at a greater willingness to ease policy to support the economy. This growing divergence in central bank outlooks puts fundamental pressure on the GBP/USD pair.
Given this backdrop, we should anticipate heightened volatility in the coming weeks. Implied volatility on GBP/USD options has already ticked up to a three-month high, suggesting the market is pricing in larger price swings. Traders should consider strategies that benefit from this, such as buying puts to hedge against further downside or using option spreads to define risk on short positions.
