Sterling extended gains on Monday as pressure grew on Prime Minister Keir Starmer after Labour’s local election result. Andy Burnham, seen as a challenger, said he would not change Chancellor Rachel Reeves’ fiscal rules if he became PM.
GBP/USD traded at 1.3414 after testing multi-week lows of 1.3302. UK Gilts rose after comments linked to Burnham’s team, amid expectations of greater state involvement and higher spending.
Market Reaction And Oil Prices
US equities were mixed as the US Dollar pared losses after a senior US official denied reports about a temporary waiver on Iran’s oil exports. WTI rose 3.21% and moved back above $100.00 a barrel.
Donald Trump said on Truth Social he would refrain from attacking Iran on Tuesday to allow talks to resume. Money markets priced in at least two Bank of England rate rises this year, according to Price Terminal data.
BoE policymaker Megan Greene said the Bank should not assume Iran-related inflation shocks will be temporary. Upcoming events include Federal Reserve minutes, speeches, and Kevin Warsh’s swearing-in as Fed Chair on Friday, plus UK jobs data and BoE speeches.
On the daily chart, GBP/USD was at 1.3434 near the 50-, 100- and 200-day SMAs around 1.3430, with resistance near 1.3608. RSI (14) was about 46.
Forward Looking Strategy
We recall the political uncertainty that gripped the UK last year, with pressure mounting on then-Prime Minister Starmer. Andy Burnham’s efforts to reassure markets provided only temporary support for the pound around the 1.34 level. Since those events in 2025, a more challenging economic outlook has pushed the GBP/USD pair significantly lower, currently trading near 1.27.
The hawkish sentiment from the Bank of England, which we saw forming in 2025, did lead to a series of rate hikes, bringing the Bank Rate to its current 5.25%. However, with UK inflation now at 2.3%, well below the 3.4% rate in the US, the market is pricing in rate cuts from the BoE sooner than the Federal Reserve. This policy divergence is a key factor weighing on the pound’s value against the dollar.
The geopolitical tensions that pushed oil over $100 per barrel last year have also subsided for now. We have seen WTI crude oil prices fall to a more stable range around $79 per barrel, easing some of the inflationary pressures that concerned policymakers like Megan Greene. This has allowed the market’s focus to shift firmly back to central bank interest rate differentials.
Given this context, derivative traders should consider positioning for potential GBP weakness in the coming weeks. With the BoE expected to adopt a more dovish tone, buying put options on GBP/USD could offer a defined-risk way to capitalize on a move lower, especially with implied volatility below the peaks we saw during last year’s political turmoil. Upcoming UK employment figures will be critical, as any sign of a weakening labour market could accelerate expectations for a BoE rate cut.
