Sterling rose by over 0.20% against the US Dollar on Tuesday, with GBP/USD near 1.3241 and still above its opening level. Risk sentiment weakened as ceasefire talk faded and the chance of a US attack rose as Donald Trump’s deadline neared.
The US Dollar Index (DXY) fell 0.14% to 99.84 as oil prices climbed. The US attacked Kharg Island, and Iran responded against US interests in the United Arab Emirates, Iraq and Saudi Arabia.
Market Reaction To Rising Geopolitical Risk
Reports said US–Iran talks were closed, while the Tehran Times said they were not closed. In US data, Durable Goods Orders fell 1.4% in February for a second month, versus forecasts for a 0.5% decline, while core goods rose 0.8% month on month versus 0.5% expected.
New York Fed President John Williams said an energy shock may lift inflation, with headline inflation expected to rise 2.75% this year. The New York Fed survey showed one-year inflation expectations at 3.4% (from 3%), three-year at 3.1% (from 3%), and five-year unchanged at 3%.
In the UK, the S&P Global Services PMI fell to 50.5 in March from 53.9, an 11-month low, while input prices rose. GBP/USD later trimmed gains as the Dollar recovered.
Looking back at the events of early 2025, we recall the intense focus on geopolitics, with GBP/USD trading above 1.3200 amid fears of a US attack on Iran. Today, the landscape is markedly different as the direct military risk premium has faded from the market. The pair is now trading significantly lower, reflecting a shift in focus back to economic fundamentals.
The stagflationary concerns from March 2025, when the UK Services PMI fell to an 11-month low, have evolved into a persistent inflation problem. With UK inflation recently reported at 3.2% for March, well above the Bank of England’s 2% target, the market expects interest rates to remain elevated. This suggests selling call options on GBP/USD could be a viable strategy to capitalize on a capped upside, as the BoE has little room to become more hawkish.
Options Positioning In A Lower Volatility Regime
In 2025, we saw the New York Fed expecting inflation to hit 2.75%, but the reality has been more stubborn, with the latest US CPI print coming in at 3.5%. This persistence keeps the Federal Reserve in a restrictive stance, limiting the US dollar’s downside. The economic divergence between a struggling UK and a resilient US economy continues to favor dollar strength against the pound.
The high implied volatility seen during the 2025 US-Iran escalation has subsided significantly, with the VIX now hovering in the mid-teens compared to the spikes we saw then. This lower volatility environment makes options cheaper, presenting an opportunity to buy puts on GBP/USD as a cost-effective way to speculate on a further decline. The rising trendline support near 1.3100, which held in 2025, was decisively broken months ago, signaling a clear long-term bearish trend.
