The British pound strengthened significantly on Wednesday, pushing the GBP/USD pair toward the psychological 1.3600 level, as hopes for a swift resolution to the US-Iran conflict combined with shifting Bank of England rate expectations to fuel a risk-on rally.
Sterling had held broadly stable on Tuesday near $1.3539, with traders balancing domestic political risks ahead of Thursday’s UK local elections against escalating tensions in the Strait of Hormuz. However, reports of potential de-escalation talks between Washington and Tehran triggered a sharp shift in sentiment.
Market participants now price in a lower geopolitical risk premium, which has weakened the safe-haven US dollar and benefited the pound. The dollar index fell, and risk appetite surged, leading investors to rotate into higher-yielding assets like sterling.
BoE rate expectations provide additional support. Jane Foley, head of FX strategy at Rabobank, noted that money markets have swung dramatically since the start of the war, now pricing in at least two 25-basis-point rate hikes from the Bank of England this year, with a strong possibility of a third. “Sterling has been one of the better G10 performers since the start of this war,” she said, as higher rates lured capital flows.
Still, analysts caution that economic weakness and political uncertainty remain headwinds. Michael Pfister, FX analyst at Commerzbank, warned that significant losses for Prime Minister Keir Starmer’s Labour Party in the May 7 local elections could increase the likelihood of a leadership change and weigh on the pound. A more left-leaning successor could pressure public finances, he added.
Technical indicators confirm the bullish momentum. The GBP/USD pair broke above its 50-day moving average, with the Relative Strength Index at 62, leaving room for further gains. A sustained break above 1.3600 would target 1.3700, while support sits at 1.3500. The current movement underscores how rapidly shifting geopolitical narratives and central bank policy expectations can reshape currency markets.
