Sterling slipped towards 1.3400 against the US dollar in Asian trade on Thursday, with demand for the greenback supported by renewed US–Iran tensions and caution ahead of the US April PCE Price Index due later in the session. Reuters reported fresh US military strikes in Iran targeting a site said to threaten US forces and commercial traffic, while Washington framed the action as measured and defensive, aimed at maintaining a ceasefire.
Donald Trump said on Wednesday he wanted a deal to end the war with Iran, adding that “I don’t care about the midterm elections”. With the conflict risk lingering, GBP/USD faced further pressure as markets reassessed UK monetary policy: expectations for a Bank of England rate rise have been pared back after softer inflation, and an unexpected increase in the April Unemployment Rate to 5.0%, alongside easing political concerns. Pantheon Macroeconomics said traders now price one fewer rate hike in 2026 than at the end of last week, and that gilt yields posted their biggest weekly drop since late-2023, attributing the move to lower oil prices, reduced betting-market odds of Sir Keir Starmer being replaced, and Andy Burnham’s commitment to current fiscal rules.
Geopolitical Tensions And The US Dollar’s Safe-Haven Appeal
We are seeing some softness in the British Pound, with the GBP/USD pair struggling near the 1.2500 level. Renewed geopolitical tensions in the Middle East are boosting the safe-haven appeal of the US Dollar. Markets are now squarely focused on this Friday’s release of the US Personal Consumption Expenditures (PCE) Price Index for April.
The US Dollar is gaining strength as a flight-to-safety asset amid the current global uncertainty. This dynamic has historically benefited the dollar, such as during the initial phases of the conflict in Ukraine. We believe traders should consider strategies that profit from rising volatility, such as purchasing straddles on major currency pairs.
This week’s PCE inflation report is critical and is expected to show core inflation remaining stubbornly above the Federal Reserve’s target, likely around 2.8%. A hot inflation number will reinforce the Fed’s ‘higher for longer’ interest rate stance. This would further strengthen the US Dollar against other currencies like the Pound.
Bank Of England Policy Uncertainty And GBP/USD Outlook
On the UK side, recent data has complicated the outlook for the Bank of England (BoE). While headline inflation has fallen to 2.3%, services inflation remains sticky, and the latest unemployment figures ticked up to 4.3%. This puts the BoE in a difficult position, likely forcing it to delay any planned interest rate cuts.
As a result, we’ve seen market expectations for BoE rate cuts in 2026 be significantly reduced over the past month. UK government bond yields have become more volatile as traders reassess the path of monetary policy. This uncertainty is a direct headwind for the Pound.
Given the divergence between a hawkish Federal Reserve and a hesitant Bank of England, we anticipate further downside for the GBP/USD pair. We feel traders should consider buying GBP/USD put options with strike prices around 1.2450 and 1.2400. This provides a clear, cost-defined way to position for a potential slide in the coming weeks.
