GBP/USD traded near 1.3610 in Asian hours on Friday after rising nearly 1% the previous day. The pair was steady as the US Dollar strengthened on safe-haven demand linked to the Middle East conflict.
On Thursday, Bloomberg reported that US President Donald Trump said he would continue a naval blockade of Iranian ports. The report also cited concerns that the Strait of Hormuz may not reopen soon, and noted Trump criticised congressional efforts to limit his war powers, including a Senate proposal rejected that day.
Us Inflation Data In Focus
US data on Thursday showed the PCE Price Index rose to 3.5% year-on-year in March from 2.8% in February, matching expectations. It increased 0.7% on the month, while core PCE rose 3.2% year-on-year after 3% in February, also in line with forecasts.
Preliminary annualised US GDP expanded 2.0% in Q1 2026 versus a 2.3% expectation, up from 0.5% previously. In the UK, the Bank of England kept Bank Rate at 3.75% in an 8-1 vote, with Huw Pill seeking a 25 basis-point rise.
Governor Andrew Bailey referred to second-round inflation risks and potential wage effects from energy-driven price pressures. He said the MPC could act pre-emptively if those pressures feed through.
Given the divergence between central banks, we should prepare for increased volatility in GBP/USD. The Federal Reserve is facing persistent inflation, while the Bank of England just held rates, creating uncertainty about the future path of interest rates. Options strategies that profit from large price swings, such as long straddles, could be advantageous over the next few weeks.
Market Volatility And Policy Divergence
The ongoing conflict in the Middle East is a significant factor driving safe-haven demand for the US dollar. We saw a similar pattern during the Red Sea shipping attacks in late 2023, which caused Brent crude oil prices to jump nearly 10% in a month. This environment suggests that any strength in the pound may be temporary, making bearish positions on GBP/USD via futures or put options a compelling consideration.
The clear split in policy is a core theme for us to trade. With US Core PCE inflation stubbornly high at 3.2%, the Fed may be forced to maintain its hawkish stance, while the BoE’s 8-1 vote to hold rates shows a committee hesitant to act. This is reminiscent of the policy divergence in 2022 when the Fed’s aggressive hikes sent the US Dollar Index (DXY) to a 20-year high, and we could see a similar trend developing now.
The Bank of England’s inaction, despite Governor Bailey’s warnings about second-round inflation effects, signals a key risk for the pound. By choosing to wait, the MPC may find itself behind the curve if energy prices continue to rise, potentially forcing more aggressive hikes later that could damage the economy. This backdrop reinforces a fundamentally weaker outlook for sterling, making it prudent to consider downside protection or speculative short positions.
