GBP/USD traded near 1.3230 in Asian hours on Friday after modest losses, with activity muted by the Good Friday holiday. The pound found some support as markets priced in two Bank of England rate rises in 2026, though the Bank’s governor said expectations may be overstated.
On Thursday, GBP/USD opened near 1.3300 and closed around 1.3220, down 0.65%. The pair remained below the 50-day EMA near 1.3400 and the 200-day EMA around 1.3360, while the Stochastic RSI was 73 and support was noted near the 2026 low of 1.3080 set in mid-March.
BoE Pricing Shifts After Iran War
Market pricing for the Bank of England shifted after the Iran war began. The BoE had cut rates by 150 basis points since August 2024 to 3.75%, and swap pricing moved from at least two cuts for 2026 to as many as four rises by mid-March, later easing to around two.
Oil rose above $100 after the Strait of Hormuz closed, and BoE staff projected CPI inflation at 3.5% by Q3 2026, versus a pre-war forecast near 2%. In North American trading, GBP/USD was 1.32144, down 0.40%, after US comments raised safe-haven demand, lifted the US dollar, pushed equities down, and drove crude higher.
We see the US Dollar Index (DXY) has climbed to a three-month high of 106.50 this week, reflecting the global flight to safety. The pound is caught between this dollar strength and a conflicted Bank of England. This leaves GBP/USD vulnerable, especially with the 2026 low of 1.3080 looking like the next logical target.
The recent surge in Brent crude to $112 a barrel has cemented fears of stagflation in the UK. We remember how UK inflation, which we saw fall to 2.3% in January 2026, is now projected by the Bank’s own staff to hit 3.5% later this year. This creates an impossible situation where the BoE is being pushed to hike rates into what is clearly a slowing economy.
Options Volatility Signals Caution
Given these conflicting signals, outright directional bets on GBP/USD are extremely risky. Implied volatility on one-month GBP/USD options has spiked to 11.5%, a sharp increase from the 7% levels we saw back in February 2026 before the Iran conflict escalated. This suggests traders should consider strategies like long straddles to profit from a large price move, regardless of which force—BoE hawkishness or geopolitical risk—wins out.
The path of least resistance appears to be lower for the pair, especially with President Trump’s rhetoric showing no signs of softening. We have seen this playbook before; during the initial trade war escalations back in 2019, safe-haven flows consistently favored the dollar over the pound. Therefore, buying puts with a strike price below 1.3100 could be a prudent way to hedge or speculate on a breakdown toward the 1.3000 psychological level in the coming weeks.
