GBP/USD fell to around 1.3420 in early Asian trading on Monday as the US Dollar edged higher. The move followed rising Middle East tensions after US-Israeli strikes on Iran over the weekend.
The United States and Israel carried out military strikes across Iran after weeks of warnings from Washington about Iran’s nuclear weapons programme. The weekend strikes increased fears of a wider regional war, supporting safe-haven demand for the US Dollar and weighing on the pair.
Uk Political And Monetary Pressure
In the UK, Labour lost a by-election in Gorton and Denton, raising questions over Prime Minister Keir Starmer’s leadership. Expectations of a more accommodative Bank of England stance also added pressure on the Pound in the near term.
The escalating conflict in the Middle East has injected significant uncertainty into the markets, driving a flight to safety. We are seeing the US Dollar benefit from this, as evidenced by currency volatility indexes, which have jumped over 15% in the last 48 hours. This defensive positioning is a primary factor weighing on the GBP/USD pair.
The direct impact of the strikes on Iran is being felt in energy markets, with Brent crude futures surging past $115 a barrel for the first time in over a year. This sharp rise in oil prices fuels fears of global inflation and an economic slowdown, further strengthening the case for holding safe-haven assets. This environment makes riskier currencies like the Pound Sterling less attractive.
We saw a similar dynamic unfold back in the early stages of the conflict in Ukraine during 2022, where the dollar index (DXY) rallied sharply over several weeks. That period showed how geopolitical shocks can create sustained trends in currency markets. Traders should anticipate a similar pattern of dollar strength if these tensions in the Middle East persist.
BoE Odds And Sterling Outlook
On the UK side, the political situation is adding to the pound’s weakness. The recent by-election loss is causing concern, with the latest YouGov poll showing the Labour government’s approval rating has dropped by 8 points to 35%. This political instability creates a challenging backdrop for the currency.
Furthermore, the Bank of England’s dovish stance is now being priced in more aggressively by the market. Overnight Index Swaps are currently indicating a greater than 70% probability of a 25-basis-point rate cut at the Bank’s next meeting. This monetary policy divergence with a more cautious US Federal Reserve puts fundamental pressure on the pound.
We only have to look back to the political turmoil of late 2022, during the brief Truss premiership, to be reminded of how sensitive the pound is to domestic political and fiscal credibility. The market punished the pound severely then, pushing it to record lows against the dollar. This history suggests that the current combination of political doubt and expected rate cuts is a potent negative mix for Sterling.
Given this dual threat of a stronger dollar and a weaker pound, we believe traders should consider strategies that profit from a fall in the GBP/USD exchange rate. Buying put options on the pound offers a defined-risk way to capitalize on further downside and the recent spike in volatility. Selling GBP/USD futures is a more direct approach for those anticipating a continued downtrend in the coming weeks.
