GBP/USD rose on Wednesday and traded near 1.3630 at the time of writing, up 0.65% on the day. The move followed broad US Dollar weakness as demand for safe-haven assets eased after reports of diplomatic progress between the US and Iran.
Axios reported that US and Iranian representatives were close to a memorandum of understanding to end the current conflict. The report also referred to a new phase of talks on Iran’s nuclear programme.
Risk Sentiment Drives Dollar Weakness
Risk appetite increased across markets, easing concerns about disruption to global energy supply. The US Dollar Index (DXY) fell 0.71% to 97.80, supporting major currencies including the Pound.
In the UK, Scottish Parliament and Welsh Senedd elections are due on Thursday, adding caution around British assets. Commerzbank said a poor result for the Labour government could raise political risk.
UK data remained firm, with the S&P Global UK Services PMI revised to 52.7 in April from 52 and up from 50.5 in March. The S&P Global UK Composite PMI rose to 52.6 from 50.3.
Markets later await the ADP Employment Change report.
Comparing 2025 Conditions With Today
Looking back, we recall a similar period in early May 2025 when a risk-on mood dominated markets. Progress in US-Iran diplomacy weakened the US dollar, pushing the US Dollar Index (DXY) down to 97.80 and lifting GBP/USD to around 1.3630. At that time, solid UK economic data provided an additional tailwind for the pound.
The environment today is markedly different, as the US dollar has shown persistent strength over the last year. The DXY is currently trading much higher, around 105.2, reflecting a more cautious global sentiment and keeping GBP/USD contained near 1.2550. This contrasts sharply with the brief period of dollar weakness we saw in 2025.
However, recent UK economic data is even more robust than what we observed last year. The S&P Global UK Services PMI for April 2026 was just reported at a strong 55.0, comfortably beating last year’s 52.7 reading. This indicates that the UK’s service-led economy is accelerating, which is a significant positive for the pound.
This economic strength is putting pressure on the Bank of England to maintain a hawkish stance, while recent softer US jobs data may give the Federal Reserve reason to pause. This potential divergence in monetary policy is creating a bullish case for the pound against the dollar. We believe this makes buying call options on GBP/USD an attractive strategy to capture potential upside.
Given the underlying dollar strength, an outright long position is risky, but a call option limits potential losses. We are considering June 2026 GBP/USD call options with a strike price around 1.2700. This position allows us to benefit if the strong UK data and a hawkish Bank of England push the pair higher in the coming weeks.
