Impact of Geopolitical Tensions on GBP/USD

US officials are reportedly preparing for a potential strike on Iran, according to Bloomberg and the Wall Street Journal. President Trump approved plans for a strike, depending on changes in Iran’s nuclear program. The market is expecting around 48 basis points of interest rate cuts in the UK by the end of the year. Currently, GBP/USD is trading close to 1.3410. This shows that the pair is struggling to gain momentum due to increasing global uncertainties and strong demand for the US Dollar. The 1.3400 level has become a key resistance, as investors seek safety amid rising unrest. Tensions in the Middle East are pushing money towards safer currencies, and this trend is likely to continue as long as the geopolitical situation remains unclear. In the UK, price pressures have slightly decreased, but the annual Consumer Price Index (CPI) is at 3.4%, far above the Bank of England’s target. While the drop since April suggests easing inflation, it’s not enough to prompt significant changes in policy. The market generally expects the Bank to maintain its benchmark rate at 4.25% for now. Expectations for rate cuts in the near future are evident in the market. About 48 basis points of easing are anticipated before the end of 2024. However, this outlook is dependent on an unstable macroeconomic landscape. Fed Chair Powell’s recent comments about inflation possibly rising again—partly due to previous tariffs—indicate that the Fed isn’t rushing to implement cuts. In contrast, the emerging softening economic pressures in the UK suggest a widening gap in expected paths between the two countries.

Implications of Inflation and Monetary Policy

However, this gap isn’t always straightforward. The market’s pricing might not match reality if geopolitical events add new risks or volatility. Recent reports highlight that US plans regarding Iran are shifting from a strategic phase to operational readiness. Potential military actions could lead to defensive positioning, further supporting the Dollar and adding pressure on the Pound. In the short term, we should observe how options markets are reacting. Implied volatility for one-week and one-month periods is increasing, indicating higher expected short-term movements, especially around central bank meetings or significant geopolitical events. Those with leveraged positions should consider tighter risk limits while volatility is high. The risk of GBP/USD going up is limited unless UK data turns unexpectedly positive or the Fed takes a softer approach due to new domestic pressures. From a market flow perspective, it’s essential to monitor changing yield differentials. Treasury yields have remained strong, driven by safe haven demand for US assets, which supports the Dollar. On the other hand, Gilts have not seen consistent demand as some investors weigh the long-term consequences of an early shift in Bank of England policy. While a near-term retest of 1.3400 seems likely, breaking below that level could become more realistic if geopolitical risks continue or if UK data suggests a more dovish outlook. Pay attention to short gamma positioning as expiry dates near; reactions in spot could be more pronounced if hedging needs increase. Directional strategies should be paired with careful execution and active hedge management, especially leading up to the next Bank of England announcement. Create your live VT Markets account and start trading now.

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