GBP/USD rose past 1.3600 and traded near 1.3650, up 0.38% on the day and over 0.50% at one point, close to a ten-week high. The move followed a second session of Dollar weakness linked to speculation of Japanese action to support the Yen.
Risk appetite stayed firm after reports that Iran sent a proposal to Washington via Pakistan. The US blockade on Iran remained in place, while Iran’s Parliament Speaker Mohammad Bagher Ghalibaf posted on X about the blockade.
Dollar Weakness And Rate Signals
In the US, the ISM Manufacturing PMI for April was unchanged at 52.7. Cleveland Fed’s Beth Hammack pointed to broadening inflation pressures and rising oil prices, and said an easing bias is “no longer appropriate”.
Minneapolis Fed’s Neel Kashkari warned that a prolonged closure of the Strait of Hormuz and damage to energy facilities could trigger a price shock. Dallas Fed’s Lorie Logan said the Fed’s next move could be a cut or a hike.
In the UK, business activity rose from 51.0 to 53.7 in April, and input prices hit their highest level since mid-2022. BoE Chief Economist Huw Pill said tighter financial conditions are a reasonable response to inflation risk from the Iran war, and the MPC is ready to act if necessary.
Markets priced 60 basis points of rate rises by year-end, while Prime Terminal data showed the Fed expected to keep rates unchanged through the year. The technical section cited support near 1.3490, 1.3436 and a major SMA cluster at 1.3413, with a prior SMA cluster noted around 1.3413 and other reference levels at 1.3436 and 1.3035.
Policy Divergence And Trading Playbook
The divergence between the Bank of England and the Federal Reserve is becoming the central theme for the coming weeks. With GBP/USD now decisively trading above 1.3600, we see a clear path for further gains. This momentum is fueled by a hawkish BoE facing persistent inflation, contrasting with a more hesitant Fed.
Our conviction in a stronger Pound is reinforced by recent UK data showing April’s headline CPI rising to 3.1%, well above the BoE’s target. This figure, combined with business input prices hitting their highest level since we saw the peaks in mid-2022, justifies the market pricing in at least two more interest rate hikes this year. We should therefore anticipate the BoE to maintain its aggressive stance to anchor inflation expectations.
On the other side of the Atlantic, the US inflation picture is stickier but less alarming, with the latest Core PCE data holding at 2.8% year-over-year. This supports the Fed’s projected pause for the remainder of the year, even as some officials voice concerns about energy price shocks. The confirmed Japanese intervention last week, which saw the Ministry of Finance sell over $50 billion, continues to weigh on the dollar across the board.
Geopolitical tensions are a critical factor, with Brent crude prices holding firmly above $100 per barrel throughout April amid the ongoing Iran conflict. This backdrop directly supports the BoE’s hawkish narrative, as outlined by its chief economist. The risks emanating from the Strait of Hormuz are now a primary consideration for inflation forecasts.
For traders, this environment makes buying GBP/USD call options an attractive strategy to capture further upside. We are looking at options with June and July expiration dates, targeting strike prices of 1.3800 or higher. This allows for participation in the upward trend while clearly defining the maximum risk.
An alternative approach is to sell out-of-the-money put options to collect premium, capitalizing on the pair’s strong technical footing. The former resistance level around 1.3450 now provides a solid floor, making strikes below this area compelling. This strategy benefits from both a rising spot price and the passage of time.
This policy divergence is the reverse of the dynamic we observed through much of 2022, when the Fed’s aggressive hiking cycle was the dominant market force. Back then, the dollar was the primary beneficiary of a central bank moving decisively against inflation. Now, it appears to be the Bank of England’s turn to lead the charge.
