GBP/USD traded near 1.3230 in Asian hours on Friday after modest losses, with activity muted by the Good Friday holiday. Markets were pricing in around two Bank of England rate hikes in 2026, though Governor Andrew Bailey said expectations may be overstated.
On Thursday, GBP/USD opened near 1.3300 and closed around 1.3220, down 0.65%. It remained below the 50-day EMA near 1.3400 and the 200-day EMA around 1.3360, while the Stochastic RSI was 73 and a 2026 low near 1.3080 was noted.
Rate Expectations Shift Since The War
Since the Iran war began, rate expectations shifted from at least two cuts for 2026 to as many as four hikes by mid-March, later easing to around two. The Bank Rate had been cut by 150 basis points since August 2024 to 3.75%, and oil rose above $100 after the Strait of Hormuz closed.
BoE staff projected CPI inflation at 3.5% by Q3 2026, versus a pre-war forecast of around 2%. In North American trading, GBP/USD was 1.32144, down 0.40%, after Donald Trump said the Iran mission could last two to three weeks and warned of strikes on energy assets without a deal.
Given the escalation from President Trump, we should expect the US dollar to remain strong due to safe-haven demand. This pressure is likely to push GBP/USD towards its mid-March low of 1.3080 in the near term. The primary driver is geopolitical fear, which is currently overshadowing UK-specific economic factors.
The sharp shift in monetary policy expectations creates significant volatility, which is a key opportunity. One-month implied volatility for GBP/USD has likely surged above 12%, a level we have not seen since the market turmoil of 2022, suggesting that options strategies designed to profit from large price swings could be effective. Traders should be prepared for sharp reversals on any news related to the Iran conflict or the Bank of England.
Bank Of England Policy Dilemma
The Bank of England is in a difficult position, caught between rising inflation and a weakening economy. The oil shock has reversed the disinflationary trend we saw in late 2025 when CPI fell towards 3.4%, with projections now showing it could hit 3.5% later this year. Governor Bailey’s comments suggest the BoE may be reluctant to hike aggressively, creating uncertainty that will weigh on the pound.
The surge in crude oil above $100 per barrel is the central problem, echoing the energy price shock we witnessed after the invasion of Ukraine in 2022. As long as the Strait of Hormuz remains a flashpoint, energy prices will keep UK inflation expectations elevated. This forces the market to price in rate hikes even as the global growth outlook darkens.
We must also consider that market positioning is likely becoming crowded on the short side for Sterling. The latest CFTC data probably shows leveraged funds have increased their net-short positions on the pound. While this reflects the current bearish sentiment, it also raises the risk of a sharp rally if tensions in the Middle East unexpectedly de-escalate.
