GBP/USD dipped after four days of gains, trading near 1.3430 in Asian hours on Friday. The US Dollar held firmer amid renewed risk aversion linked to uncertainty over a US-Iran ceasefire.
Traders are waiting for the US Consumer Price Inflation (CPI) report due later in the North American session. Overall sentiment stayed cautious.
Geopolitical Risks And Market Sentiment
Israel continued strikes on Hezbollah, while Benjamin Netanyahu said Israel will begin direct talks with Lebanon soon. Donald Trump said US forces will remain deployed around Iran until full compliance with the agreement.
JD Vance, Steve Witkoff, and Jared Kushner are set to meet in Pakistan this weekend about a possible long-term deal with Iran. Iran’s Esmaeil Baghaei said talks to end the war depend on the US keeping its ceasefire commitments.
Baghaei said those commitments include a ceasefire in Lebanon, which the US and Israel said was not part of the deal. Andrew Bailey warned the Iran war could trigger a 2008-style crisis tied to stress in the opaque $3 trillion (£2.2 trillion) private credit market.
Volatility Hedging And Positioning
Looking back at the geopolitical tensions of 2025, the market’s cautious sentiment from that time has created lasting effects we see today. The persistent risk aversion, fueled by last year’s US-Iran standoff and Israeli military actions, continues to drive capital towards safe-haven assets. We see this reflected in the CBOE Volatility Index (VIX), which has established a higher floor around 18, compared to the pre-2025 average of 14.
Given this elevated uncertainty, traders should consider buying protection against sudden market swings. Call options on the VIX or VIX futures are a direct way to profit from an increase in expected volatility over the next several weeks. This strategy acts as an effective hedge for long-equity portfolios that are vulnerable to geopolitical shocks.
The US Dollar’s role as a primary safe haven, which we saw strengthen during the 2025 ceasefire talks, remains a key theme. The Dollar Index (DXY) has gained nearly 3% since the start of this year, a trend we expect to continue as Mideast tensions simmer. Using derivatives to maintain a long position in the US Dollar, either through futures contracts or call options against a basket of currencies, is a prudent move.
Conversely, the British Pound appears vulnerable, a concern Governor Bailey noted last year. With UK inflation remaining stubbornly above the Bank of England’s target at 3.1% last quarter and GDP growth stalling, the GBP/USD pair is under pressure. We believe buying put options on GBP/USD offers a cheap way to position for further downside in the Pound.
The threat of energy shocks mentioned by the BoE governor in 2025 has kept inflation expectations higher for longer. This suggests the Federal Reserve may be slower to cut rates than the market currently prices in. Therefore, traders should examine interest rate derivatives, such as positioning in SOFR futures to bet on rates remaining elevated through the third quarter of 2026.
Governor Bailey’s warning about the private credit market is more relevant than ever, as the market has grown to an estimated $3.5 trillion. Credit spreads on high-yield corporate debt have widened by 50 basis points in the last two months alone, indicating rising stress. Buying credit default swap (CDS) protection on indices like the Markit CDX North American High Yield Index is a direct way to hedge against a potential credit event.
