GBP/USD traded near 1.3565 on Monday, up 0.23%, as the US Dollar weakened amid stronger risk appetite. This followed reports of an Iranian proposal to reopen the Strait of Hormuz and end the conflict with the US.
The US Dollar fell as market participants moved away from safe-haven positions. Attention is also on the Federal Reserve decision on Wednesday, with expectations for no rate change in the 3.50%–3.75% range.
Uk Outlook Ahead Of Boe
In the UK, markets are cautious ahead of the Bank of England meeting on Thursday. A hold at 3.75% is expected, with core inflation easing as CPI excluding volatile items rose 3.1% year on year in March, down from 3.2%.
There is still division on the Monetary Policy Committee. Chief Economist Huw Pill pointed to the need for tighter conditions to curb inflation, while Governor Andrew Bailey said no immediate change is needed despite recent shocks.
The Pound has been supported by repricing of rate expectations linked to resilient growth and persistent inflation. Domestic political risks in the UK may limit further gains, while central bank guidance and Middle East developments remain key drivers.
Given the improving risk sentiment, we are seeing short-term strength in GBP/USD, but the key events this week are the central bank meetings. Implied volatility for the pair has noticeably increased, with 1-month options pricing in larger swings than we saw last month, climbing from 7% to over 9.5%. This suggests traders are positioning for a breakout rather than continued calm.
Volatility Strategies And Event Risk
The Bank of England’s expected hold at 3.75% comes with significant internal division, creating uncertainty. While the 3.1% core inflation figure from March is a relief, we recall that headline CPI for February 2026 ticked up to 3.3%, keeping pressure on the more hawkish members. Traders might consider using options strategies like straddles to profit from a potential post-meeting spike in volatility, regardless of the direction.
On the other side of the pair, the Federal Reserve is also expected to stay on hold, which has kept the US dollar subdued. The recent Non-Farm Payrolls report from March, which showed a solid but not inflationary gain of 215,000 jobs, supports this wait-and-see approach. This environment suggests that any dollar weakness may be limited unless the Fed provides surprisingly dovish guidance on Wednesday.
The positive geopolitical news from the Middle East is providing a temporary boost to risk assets like the pound. However, we must balance this against the rising domestic political risks in the UK that have been flagged as a potential headwind. This conflict suggests that while call options on GBP/USD look attractive now, purchasing some downside protection through puts could be a prudent hedge.
We remember from the rate hiking cycle in 2025 that the pound’s initial strength often faded as concerns about the UK’s economic resilience took over. A similar pattern could emerge if the Bank of England sounds worried about growth, even while holding rates steady. Therefore, selling covered calls against existing long positions above the 1.3600 level could be a strategy to capitalize on the current optimism while acknowledging the potential for a limited upside.
