Insights 
VT 
GBP/USD hit 1.3724, the highest since January 2022. This follows improved risk appetite aided by a US-brokered ceasefire between Israel and Iran. Jerome Powell of the Federal Reserve warned about the inflationary effects of Trump’s tariffs, suggesting careful rate cut decisions. Donald Trump mentioned upcoming discussions with Iran but questioned the need for diplomatic moves regarding its nuclear programme.
Speculation arises as Trump considers candidates to replace Powell, with Kevin Warsh and Kevin Hassett mentioned as possibilities. In the UK, Bank of England Governor Andrew Bailey pointed out labour market weakening and potential impacts on wage growth. He also highlighted concerns over increasing social security contributions affecting economic inactivity.
The Pound Sterling
The Pound Sterling is a key currency, involved in 12% of global transactions, and its value is chiefly influenced by Bank of England’s monetary policies aimed at maintaining steady inflation. Economic indicators like GDP and employment data can influence GBP value with a strong economy boosting the currency. Trade balances also play a role, with positive balances strengthening the currency due to demand for exports.
With GBP/USD reaching 1.3724—the highest level seen since January 2022—the trend is clearly being shaped by shifts in geopolitical risk and monetary signals. This recent surge in the currency pair comes on the heels of a temporary calming of tensions in the Middle East, aided by mediation that quieted market jitters. Broad risk sentiment lifted, and the Pound gained further on this lift in mood.
On the American side, Powell pointed to the inflationary pressure that could rise if trade policies become more restrictive again. This adds weight to speculation that rate cuts may be slower to arrive than markets had hoped. That said, his tone was measured, suggesting that any policy change will come in response to data rather than politics.
Trump’s comments, while casual in delivery, are stirring debate. He raised questions around diplomatic engagement with Iran’s nuclear ambitions, noting upcoming talks but expressing doubts about their usefulness. His remarks hint at a broader desire to reshape how the US approaches both diplomacy and central banking. The idea of replacing Powell is gaining traction, with Warsh and Hassett floated as possible successors. Both are known for previously favouring tighter monetary policy, which would represent a sharp turn from the current approach.
Changes in Leadership
For those of us watching longer-term positions, the potential departure of Powell introduces a layer of uncertainty that cannot be ignored. A change in leadership could bring shifts in communication style and in tolerance for inflation. This would filter through the rate curve quickly.
Back in the UK, Bailey’s comments deserve more attention than they were initially given. He acknowledged clear evidence that the labour market is losing strength—growth in employment is slowing, and wage increases are no longer keeping pace with prior months. His reference to rising national insurance contributions draws attention to a growing issue: the large number of people no longer active in the workforce, not because they are unemployed, but because they are choosing not to participate. These structural issues matter more than headline inflation right now.
For British assets, the responsiveness of the Bank of England to such changes in domestic participation and wage setting is becoming more relevant than crude measures of inflation pressure. Slowing wage growth makes it harder for the Monetary Policy Committee to justify keeping interest rates higher for longer.
Market participants should pay close attention to the next employment report, particularly inactivity data and hours worked. These will provide clearer signals on whether the Bank’s next move will be to cut or to hold. The currency response this week hints that markets are already leaning one way.
We would suggest being wary of assuming straightforward rate differentials will continue to drive GBP/USD. While the Pound is supported in part by global transaction flows—reflecting its role as a reserve currency—its direction of travel in the short-term is likely to be shaped more by domestic policy tone than broad FX trends.
Where global events reduced panic selling and opened up risk trades, what matters now is whether that rise in sentiment can be sustained. The combination of policy uncertainty in the US and a slight softening shown by the UK’s central bank is creating an unusually wide field of possible outcomes.
Each data release and speech now carries more weight than it did just weeks ago. For positional traders, implied volatility might underprice what’s coming next.
