GBP/USD edged up to about 1.3230 in Asian trading on Friday after small losses the day before. Trading may be quieter because of the Good Friday holiday.
Sterling found support as markets price in two Bank of England rate hikes in 2026, linked to higher energy prices and inflation worries. BoE Governor Andrew Bailey said these expectations may be overstated.
BoE Expectations And Holiday Thin Liquidity
Any rise in GBP/USD may be capped if the US Dollar strengthens on safe-haven demand after recent threats from US President Donald Trump towards Iran. Trump gave no clear steps on reopening the Strait of Hormuz and warned of stronger military action within two to three weeks.
Iran’s Foreign Minister Abbas Araghchi said recent US strikes on civilian infrastructure would not cause Iran to retreat. Chicago Fed President Austan Goolsbee said higher oil prices could hinder efforts to lower inflation, especially if petrol costs lift inflation expectations.
The Pound Sterling dates back to 886 AD and is the UK’s official currency. It is the fourth most traded FX currency, making up 12% of transactions, or about $630 billion a day in 2022.
Key pairs include GBP/USD (11% of FX), GBP/JPY (3%), and EUR/GBP (2%). The BoE targets about 2% inflation and uses interest rates to influence prices and activity; trade balance and data such as GDP, PMIs, and employment can also move GBP.
Options Positioning For Event Risk
We are seeing a tug-of-war in GBP/USD as the market prices in two Bank of England rate hikes this year. This is creating a floor for the pound, but geopolitical tensions surrounding Iran are boosting the dollar’s safe-haven appeal. With many traders away for the Good Friday holiday, we expect volatility to pick up next week.
The expectation for BoE hikes is supported by the latest UK CPI data for February, which remained stubbornly high at 3.8%. This persistence makes rate hikes a real possibility, despite Governor Bailey’s cautious tone. Buying long-dated call options on GBP/USD could be a way to position for this upside while limiting risk if the geopolitical situation worsens.
President Trump’s threats regarding the Strait of Hormuz are the primary driver for dollar strength, pushing Brent crude prices above $95 a barrel. Any further escalation could see a flight to safety, strengthening the USD and putting significant pressure on the pound. This makes holding short-term put options on the pair a viable hedge against sudden military action.
However, the economic picture isn’t entirely clear, as we recall the BoE’s hesitation to act decisively in late 2025 when energy prices first began to climb. The latest UK services PMI showed modest growth at 52.5, but manufacturing contracted, and recent US jobless claims also ticked higher. This underlying economic softness on both sides could limit how aggressively either central bank acts.
The conflicting signals from monetary policy expectations and geopolitical risks suggest implied volatility is likely undervalued. We see an opportunity in strategies like straddles or strangles on GBP/USD, which profit from a large price move in either direction. These positions would capitalize on the uncertainty over the next few weeks, regardless of whether the BoE or the Iran situation becomes the dominant story.
