GBP/USD ended a seven-day rise and traded near 1.3560 in Asian trading on Wednesday. It fell as the US Dollar edged up, while safe-haven demand stayed weak due to stronger market optimism linked to possible Middle East diplomacy.
The US and Iran were reported to be preparing for a second round of peace talks before a two-week ceasefire deadline. Tensions in the Strait of Hormuz continued, adding to global energy risks, and President Donald Trump said talks could restart this week while rejecting a 20-year pause in Iran’s nuclear enrichment.
US inflation data eased after the Producer Price Index rose 0.5% month-on-month, below the 1.2% consensus. Core PPI was 0.1% month-on-month versus 0.6% expected, while PPI was 4% year-on-year in March against a 4.6% forecast and up from 3.4% in February.
Core PPI was unchanged at 3.8% year-on-year. In the UK, the 10-year gilt yield fell towards 4.7% as oil prices dropped on expectations of renewed US-Iran talks, while markets priced in nearly two Bank of England rate rises by late 2026.
Demand for UK bonds remained strong, with a 10-year gilt syndication drawing record bids of £148 billion.
We remember the pause in the pound’s rally around 1.3560 back in 2025, which was driven by shifting geopolitical hopes. Today, with GBP/USD struggling to hold the 1.2850 level, the fundamental picture is far weaker. This suggests options strategies that profit from downside risk, such as buying puts on the pound, could be more effective than waiting for a return to last year’s highs.
Those US-Iran diplomatic efforts we saw in 2025 ultimately proved fragile, offering only a short-term dip in energy prices. Now, with Brent crude futures again pushing past $95 a barrel amid renewed shipping security concerns in the Strait of Hormuz, we see an underpriced risk of a supply shock. Long-dated call options on energy ETFs or crude futures could be a sensible hedge against a sudden price spike in the coming months.
The soft 4% annual Producer Price Index reading from March 2025 fueled hopes of Federal Reserve rate cuts that never fully materialized. With US core inflation proving stubborn throughout the past year and now holding at 3.5%, the “higher for longer” interest rate environment is the reality. This makes selling Fed Funds futures for late 2026 expiry a compelling trade, betting against market expectations of significant easing.
Looking back at 2025, the market was pricing in future Bank of England rate hikes when the 10-year gilt yield was near 4.7%. Now that the Bank has delivered one of those hikes and UK inflation has moderated to 3.2%, that cycle is over. The record demand for gilts has persisted, suggesting that positioning for a policy pivot through interest rate swaps, specifically paying a floating rate to receive a fixed rate, is an attractive strategy.
