GBP/USD came under selling pressure on Tuesday after modest gains on Monday, as the US Dollar rebounded and UK preliminary S&P Global PMI data came in weaker than expected. The pair traded near 1.3395 early in the US session, while the US Dollar Index was around 99.40. Market sentiment also weakened amid rising risk aversion linked to the Iran conflict. A Wall Street Journal report said US-aligned Gulf states moved closer to direct involvement, with Saudi Arabia signalling a potential military shift.

Middle East Conflict And Risk Sentiment

Israel carried out another attack on Iran after US President Donald Trump indicated a pause in strikes on energy infrastructure. Iran’s Foreign Minister Abbas Araghchi said there had been no engagement with Washington, and Parliament Speaker Mohammad Bagher Ghalibaf said on Monday that no negotiations had taken place. UK PMI figures showed slower business activity in March. The Composite PMI fell to 51.0 from 53.7 versus 52.8 expected; Services dropped to 51.2 from 53.9 versus 53.0 forecast; Manufacturing eased to 51.4 from 51.7, above the 51.1 estimate. Focus turns to US preliminary PMI data later Tuesday, then UK CPI and PPI on Wednesday. The BoE held rates at 3.75%, and the Fed kept rates unchanged in the 3.50%–3.75% range. Looking back to this time in 2025, we saw the GBP/USD pair struggling under 1.3400 as conflict flared in the Middle East. Today, the landscape is different, with the pair trading significantly lower near 1.2550 as the US Dollar Index has since climbed to 105.20. The market has spent a year digesting the new geopolitical and economic realities.

Macro And Policy Divergence Outlook

The direct military conflict involving Iran, which we saw escalating last year, has since subsided into a tense standoff, though rhetoric remains heated. Oil prices, after spiking above $110 per barrel in mid-2025, have stabilized, with Brent Crude recently trading in a range around $90 per barrel. Shipping volumes through the Strait of Hormuz are operating at about 90% of pre-conflict levels, but higher insurance premiums are now a permanent feature of the market. Unlike the slowdown we saw in March 2025 when the Composite PMI hit a six-month low of 51.0, the UK economy is showing more resilience. The latest S&P Global Composite PMI for February 2026 registered a solid 53.0, indicating steady expansion in the services sector. This improvement comes as the headline Consumer Price Index has cooled considerably, with the latest data showing inflation at 3.4%. This evolving data puts the Bank of England in a new position. After holding rates steady at 3.75% during the peak uncertainty last year, the BoE is now widely expected to begin an easing cycle to support the economy. We see markets pricing this in, with Overnight Index Swaps showing a greater than 75% probability of a 25-basis-point rate cut by the June meeting. In contrast, the Federal Reserve faces a different picture, as core inflation in the US has proven more persistent, recently printing at 3.2% for February 2026. This stickiness, combined with a robust labor market, suggests the Fed will likely hold its benchmark rate steady for longer than the BoE. This growing policy divergence is becoming the primary driver for foreign exchange markets. Given this backdrop, traders should consider positioning for further GBP/USD weakness driven by the widening interest rate differential. Using derivative instruments like 3-month put options on the GBP/USD allows for a defined-risk approach to this view. For those managing interest rate exposure, positioning in SONIA futures to reflect the anticipated BoE rate cuts appears to be the consensus trade. Create your live VT Markets account and start trading now.

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