Rising Geopolitical Risk
Iran’s Foreign Minister Abbas Araghchi said there had been no engagement with Washington. Iranian Parliament Speaker Mohammad Bagher Ghalibaf also said on Monday that no negotiations had taken place, while adviser Mohsen Rezaei said the conflict would continue until Iran receives full compensation for damage incurred. Markets are awaiting Tuesday’s flash S&P Global PMI data for March in both countries. UK manufacturing PMI is forecast at 51.1 versus 51.7, and services at 53.0 versus 53.9, with weaker readings potentially affecting expectations for Bank of England policy. The Bank of England held rates at 3.75% at its March meeting on Thursday. Governor Andrew Bailey said the Middle East conflict is expected to shock the economy and lift inflation near term, and noted the Strait of Hormuz as key for restoring safer shipping and easing energy prices. We recall the risk aversion that gripped markets in March 2025 as tensions with Iran flared up, driving GBP/USD down from the 1.3400 level. That period validated the safe-haven appeal of the dollar, while the Pound bore the brunt of the geopolitical shock to energy prices. Looking back, the Bank of England’s fears were realized as Brent crude briefly spiked over $115 per barrel that spring, forcing inflation to remain elevated for two more quarters.Volatility And Policy Outlook
Today, with the pair trading near 1.2850, the market’s memory of that volatility remains a key factor for us. While direct conflict has subsided, options pricing shows a persistent risk premium on any news out of the Strait of Hormuz. Implied volatility for GBP/USD, currently around 8.5%, is still elevated compared to the pre-2025 average of 6%, suggesting traders should be prepared for sharp, sudden moves. The Bank of England’s response to that inflation shock has left its key rate at 4.25%, yet the economy is now showing signs of strain. Last month’s UK services PMI fell to 51.5, a concerning echo of the slowdown we saw begin in the flash PMI data from March 2025. This divergence between a hawkish central bank and a weakening economy makes long volatility strategies, such as buying straddles on GBP/USD, attractive ahead of key data releases. Create your live VT Markets account and start trading now.
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