GBP/USD rose to about 1.3630 on Friday, up 0.54% on the day. It moved higher as the US Dollar weakened after the US employment report.
US Nonfarm Payrolls rose by 115K in April, above the 62K expected. March payrolls were revised up to 185K from 178K, while the Unemployment Rate held at 4.3%.
Annual Average Hourly Earnings increased by 3.6% versus 3.8% expected. This eased inflation pressure concerns and supported expectations of future Federal Reserve rate cuts.
Risk appetite improved amid optimism over US–Iran talks, despite reports of US airstrikes on several tankers near the Strait of Hormuz. The US Dollar Index fell towards 97.90.
In the UK, GBP was steady despite early local election results. Labour lost control of several local councils, while Reform UK made gains, and Keir Starmer said he is not considering resignation.
Bank of England remarks also supported GBP. Governor Andrew Bailey said the BoE could act “forcefully” if Middle East tensions raise energy prices and inflation, after keeping the policy rate at 3.75%.
Looking back to this time in 2025, we saw the Pound rally strongly against the Dollar as US wage growth softened, fueling bets on Federal Reserve rate cuts. The market was optimistic, pushing GBP/USD above 1.36 while the Bank of England maintained a tough stance on inflation with its policy rate at 3.75%. This created a clear narrative of policy divergence that favored Sterling.
Today, the environment for Federal Reserve easing is far less certain, which should inform our strategy. Recent US inflation data has proven sticky, with the Consumer Price Index holding near 3.4%, well above the Fed’s target. While the labor market has cooled, with nonfarm payrolls averaging around 180,000 in early 2026, it is not weak enough to force the Fed’s hand toward aggressive cuts.
On the other side of the Atlantic, the Bank of England’s hawkish resolve from last year has softened considerably. The UK economy narrowly avoided a prolonged recession through 2025, but growth remains stagnant at just 0.4% year-over-year. With UK inflation having fallen faster than expected to 2.1%, markets are now pricing in at least two interest rate cuts from the BoE this year.
This reversal means traders should consider positioning for a lower GBP/USD exchange rate compared to the highs of 2025. The interest rate advantage that Sterling enjoyed is evaporating, making long positions less attractive. We should use forward contracts to see how the market is pricing this shift, as the premium for holding pounds is diminishing.
Given the shifting central bank outlooks, options strategies that benefit from increased volatility could be prudent. One-month implied volatility for GBP/USD has risen from last year’s lows and is now sitting around 7.5%, reflecting the market’s uncertainty. Traders could use straddles to trade this uncertainty without betting on a specific direction in the immediate short term.
