GBP/USD rose by over 0.20% to about 1.3560 as risk appetite improved and the US Dollar eased. A US-Iran ceasefire held, pushing oil prices and the USD lower, while US equities moved higher.
Fighting was reported on Monday as the US Navy began ‘Operation Freedom’ and Iran retaliated during a continued blockade of Iranian ports. Reports also said the US military destroyed six Iranian boats linked to plans to block shipping in the Strait of Hormuz.
Market And Data Drivers
Iran reportedly resumed attacks on the UAE, damaging oil facilities and causing a spike in oil prices. In US data, the ISM Services PMI fell to 53.6 in April from 54 in March; employment improved from 45.2 to 48, and prices paid stayed at 70.7.
The US trade deficit widened in March, with imports up 3.6% and exports up 3.1%. Job openings fell to 6.866 million from 6.922 million, below forecasts of 6.83 million.
In the UK, markets shifted from expecting two rate cuts to pricing nearly 68 basis points of tightening by end-2026. The UK 30-year Gilt yield peaked at 5.787%, its highest level since 1998.
We need to remember that the optimism from last year’s fragile US-Iran ceasefire was a temporary driver for Sterling. At that time in 2025, GBP/USD was pushing towards 1.3600 on hopes of improved risk appetite. Today, the pair is trading significantly lower, near 1.25, showing that fundamental economic drivers have since taken over.
The signs of a US slowdown we saw in 2025, like the ISM Services dropping to 53.6, have become more pronounced. Recent data for April 2026 shows the ISM Services PMI actually fell into contraction territory below 50, which is a much clearer signal of economic weakness. This confirms the trend we were watching last year, but the reality of it is now weighing on market sentiment more heavily.
BoE Expectations Reversal
The biggest shift for us is in Bank of England expectations, which has completely reversed. Last year, markets were pricing in nearly 68 basis points of rate hikes by the end of 2026, which supported the Pound. As of today, money markets are pricing in at least 50 basis points of rate cuts from the BoE this year as UK inflation has cooled faster than anticipated.
This policy reversal is clearly visible in the Gilt market, providing a solid anchor for our trading view. We saw the 30-year Gilt yield peak at an alarming 5.787% during the sell-off in 2025. That yield has now retreated to around 4.7%, reflecting the market’s conviction that the next move from the BoE is down, not up.
While geopolitical tensions in the Middle East persist, they are no longer causing the dramatic oil price spikes we saw during the direct US-Iran confrontations of 2025. The market seems to have priced in a level of sustained risk, making economic data and central bank policy the primary focus. This means we should focus less on headline risk from the Strait of Hormuz and more on inflation and employment figures.
Considering this major shift from expected BoE hikes to expected cuts, the path of least resistance for GBP/USD appears to be lower. For derivative traders, buying put options on GBP/USD could be a prudent strategy to position for further downside, especially heading into the next BoE meeting. Volatility is likely to increase, making options a more capital-efficient way to express a bearish view compared to shorting the spot market directly.
