Pound Sterling traded a little lower on Thursday, near 1.3400 against the US Dollar during the European session. Trading was subdued as sentiment turned more cautious after a ceasefire announcement in the Middle East on Wednesday.
S&P 500 futures fell 0.2% to about 6,770 in European trade, while the US Dollar Index rose slightly to near 99.10. Markets weighed uncertainty over the durability of a two-week US-Iran truce.
Market Sentiment Shifts
Concerns increased after Israel continued attacks on Iran-backed Houthis in Lebanon. Reuters reported the Israeli Defense Forces killed Ali Yusuf Harshi, described as the personal secretary and nephew of Hezbollah Secretary-General Naim Qassem.
Iran’s parliament speaker and chief negotiator, Mohammad Bagher Qalibaf, accused the US of breaking the first clause of a 10-point proposal in a post on X. The clause called for “an immediate ceasefire everywhere, including Lebanon and other regions, effective immediately”.
The US and Iran said they will send teams to Pakistan for the first round of talks on the 10-point peace plan. In the UK, traders looked for new signals on the Bank of England outlook as shifting inflation expectations could change interest rate bets.
We recall the market’s cautious mood in April 2025, with a fragile Middle East ceasefire keeping everyone on edge. Back then, fears of high energy prices had us betting on more Bank of England rate hikes, pushing GBP/USD to 1.3400. That entire narrative has now completely flipped over the past year.
Central Bank Policy Divergence
With the de-escalation holding, energy prices stabilized, and UK inflation has fallen back towards the target, recently reported at 2.4% for March 2026. This has shifted the focus entirely towards BoE rate cuts, with markets now pricing in at least two cuts before the end of the year. Consequently, we’ve seen the Pound weaken significantly from those 2025 highs, trading now near 1.2550.
On the other side of the trade, the US economy remains robust, with the latest Non-Farm Payrolls report for March 2026 showing a stronger-than-expected gain of 275,000 jobs. This persistent strength gives the Federal Reserve little reason to rush into cutting rates, keeping the US Dollar well-supported. This divergence in central bank policy is the key driver for derivative strategies in the coming weeks.
Given this clear policy divergence, selling sterling strength through call options or establishing bearish positions on GBP/USD futures appears logical. The market’s fear gauge, the VIX index, is currently hovering near a relatively calm 15, a stark contrast to the risk-averse jitters we saw in 2025. This suggests options are not excessively expensive for positioning for further pound weakness against the dollar.
