GBP/USD edged higher to around 1.3450 in Asian trading on Monday after small losses previously, as the US Dollar softened with risk aversion easing on reports of a US–Iran peace deal and the reopening of the Strait of Hormuz. The New York Times said President Trump described the agreement as ensuring the strait would be “permanently toll-free”, while Bloomberg cited Pakistan’s Prime Minister Shehbaz Sharif as saying a near four-month war would end with an immediate and permanent halt to military operations on all fronts, including Lebanon. Iran’s National Security Council confirmed a ceasefire, saying final talks would begin once commitments under a memorandum of understanding are met, and Iranian officials called for the maritime blockade to end immediately and entirely.
In the UK, a 0.1% contraction in April—its first monthly decline since August—has complicated the outlook for Bank of England policy ahead of Thursday’s meeting. The BoE targets inflation of around 2% and is widely expected to keep rates unchanged, with markets watching early inflation and employment data. Separately, the June 18 Makerfield by-election sits alongside the pound’s broader profile in FX: it dates to 886 AD, ranks fourth most traded, accounts for 12% of transactions and averages $630 billion daily based on 2022 data; key pairs include GBP/USD at 11% of FX, GBP/JPY at 3% and EUR/GBP at 2%.
US Dollar Weakness And Geopolitical Easing Drive Sterling Up
We are seeing GBP/USD rise due to significant US dollar weakness following the reported US-Iran peace agreement. This de-escalation is a classic risk-on signal, causing investors to sell the safe-haven dollar. The VIX index, a key measure of market fear, has fallen over 20% to below 13, while Brent crude oil has dropped nearly 8% as the Strait of Hormuz is set to reopen.
Economic Headwinds and Policy Uncertainty Limit GBP Gains
However, we believe this sterling strength is fragile and likely temporary. The UK economy contracted by 0.1% in April, and last week’s inflation figures for May unexpectedly cooled to 2.1%, easing pressure on the Bank of England to act. This underlying weakness in the UK economy provides a strong headwind for the pound.
Consequently, we anticipate the Bank of England will hold interest rates steady this Thursday, June 18th. Derivative markets now reflect this, pricing in only a 15% chance of a rate hike this week, a dramatic reversal from the 60% probability seen just one month ago. The central bank’s likely pause contrasts sharply with the improving global risk environment.
This suggests any rallies in GBP/USD toward the 1.3500-1.3550 area present selling opportunities. With geopolitical news causing implied volatility to fall, buying GBP/USD put options is now a more cost-effective strategy to position for a potential downturn. We see this as a chance to hedge against a reversal driven by domestic UK factors.
We are also watching the Makerfield by-election on the same day, as a decisive result could introduce new uncertainty about the UK’s future fiscal policy. Historically, when the Bank of England signals a pause during a period of global risk-on, sterling’s gains against the dollar have been short-lived and capped. This week’s domestic events are likely to reassert themselves as the primary driver for the pound.
