GBP/USD extended gains for a third day, trading near 1.3400 in Asian hours on Wednesday, after the US and Iran agreed to a two-week ceasefire. Lower safe-haven demand pushed the US Dollar down and supported the pair.
Upside may be capped if the Pound weakens as the ceasefire eases oil prices and reduces inflation pressure, giving the Bank of England more scope to cut rates. Before the conflict, markets priced in two to three rate cuts for 2026, but those expectations were later removed after an energy-led inflation shock.
Ceasefire Shifts Risk Sentiment
On Tuesday, GBP/USD rose from the low 1.3200s to the upper 1.3300s and moved above the 50 and 200-period hourly moving averages. The move followed a shift towards risk-taking after President Trump announced the two-week ceasefire with Iran.
WTI fell from above $106 to below $90 per barrel, while S&P 500 futures rose by over 1%. The US Dollar Index moved back towards 100.00, after earlier being reported down 0.14% to 99.84.
The two-week ceasefire between the US and Iran has completely changed the short-term outlook for us. We have seen WTI crude oil prices collapse from over $106 to below $90, immediately easing the risk premium that had propped up the US Dollar. This has provided the tailwind for GBP/USD to push towards the 1.3400 handle.
Our focus now pivots to the Bank of England, as this sharp drop in energy costs directly impacts UK inflation expectations. The SONIA overnight index swap market is already pricing in a nearly 40% chance of a 25 basis point rate cut by the June meeting, a sharp reversal from just 5% last week. This indicates that the market is beginning to look past the February inflation print, which showed CPI at a high of 4.2%, and is anticipating a much softer reading for April.
Positioning Around Bank Of England Risk
Given this shift, we should consider hedging against further sustained Sterling strength, as the narrative could quickly move from US dollar weakness to potential Pound weakness. Buying GBP/USD put options with a late May or June expiry allows for a position that benefits if the Bank of England signals a return to its easing cycle. This strategy also provides a hedge in the event the fragile ceasefire collapses and safe-haven demand for the dollar returns.
We saw a similar dynamic unfold after the 2022 energy shock, where central banks that were forced to tighten aggressively gained flexibility once commodity prices began to normalize throughout 2023. Historically, currencies whose central banks pivot from a hawkish to a dovish stance tend to underperform. We are now watching for any communication from policymakers that confirms this potential shift in the coming weeks.
