GBP/USD edged higher on Friday, rebounding from intraday lows as risk appetite improved on talk of a possible US-Iran political understanding. The pair was trading near 1.3460 and was set to finish the week broadly flat. Reuters cited an Iranian source saying an agreement had been reached but not finalised, following reports of a proposed 60-day memorandum of understanding to extend the ceasefire and reopen the Strait of Hormuz. In separate comments, Donald Trump said the naval blockade on Iranian ports would be lifted and demanded Iran forgo a nuclear weapon, while calling for the strait to be opened without tolls for two-way shipping.
The softer tone weighed on the US Dollar, aiding Sterling, as the US Dollar Index (DXY) traded around 98.80 after touching a seven-week high of 99.54 on Thursday. Oil prices eased, with WTI near $86 a barrel and heading for its first monthly decline in five months, though it remains above pre-war levels, keeping inflation risks in view. Policy attention stayed on inflation and rates: the BoE’s Andrew Bailey pointed to economic softness and war-related uncertainty, while Kansas City Fed President Jeff Schmid flagged the case for a more restrictive stance. Next week’s focus includes flash PMI releases and the US Employment Situation Report, covering NFP, the unemployment rate and wage growth.
Global Risks Ease and Policy Divergence Emerges
We see the potential for a US-Iran deal as a significant de-risking event for the global economy. The immediate impact has been a pullback in oil prices, with WTI crude down nearly 8% in May, its first monthly loss since December 2025. This eases some pressure on the US dollar as a safe-haven asset, allowing currencies like the British pound to recover.
The British pound’s recent strength may be short-lived, as the Bank of England appears to have pivoted to a more cautious stance. Governor Bailey is clearly concerned about economic softness, a view supported by the latest S&P Global/CIPS UK Composite PMI which registered 48.9, indicating a contraction in private sector activity. This suggests the BoE’s rate hiking cycle, which has brought the Bank Rate to 5.50%, is likely over for now.
In contrast, the US Federal Reserve seems committed to further policy tightening to combat stubbornly high inflation. The most recent US Core CPI reading of 3.8% year-over-year remains well above the Fed’s 2% target, reinforcing the hawkish message from Fed officials. This growing divergence in central bank policy is a dominant theme that we believe will drive currency markets in the weeks ahead.
Trading Implications and Key Data to Watch
For derivative traders, this environment suggests a potential decline in oil market volatility. With the primary geopolitical risk factor easing, the CBOE Crude Oil Volatility Index (OVX) could fall from the elevated levels seen during the conflict. We believe strategies that profit from falling volatility, such as selling straddles on oil futures, could become attractive.
Given the policy divergence, we anticipate underlying weakness in the GBP/USD pair once the relief from the Iran news subsides. We are looking at using options to position for a move lower, possibly by purchasing put options with a target below the 1.3300 level. This provides a defined-risk way to bet on a stronger dollar and a more stagnant UK economy.
Looking to next week, the US Nonfarm Payrolls report will be the critical data point. The market consensus is for a gain of around 190,000 jobs, and a strong number would validate the Fed’s hawkish stance and could accelerate the dollar’s recovery. We will be watching this report closely as it could be the catalyst for the next major move in currency and interest rate markets.
