The near-term outlook for sterling has reverted to caution as fluid geopolitical developments remain a top source of market uncertainty.

The recent rise in risk appetite following President Donald Trump's announcement regarding a potential U.S.-Iran deal had supported the pound, which rebounded from recent lows near the lower end of its 1.33-1.35 range, stabilizing around 1.34. However, confidence in an accord remains fragile. Iran's FARS news agency cited a source close to the negotiating team flatly dismissing reports of a Sunday signing ceremony in Geneva as false, which has tempered GBP/USD gains.

The reaction in the oil market, which rallied off session lows on the FARS news but remains down 2.5% on the day, underscores the link between oil prices and inflation expectations. Elevated oil prices have implications for UK and global inflation, and a swift resolution to the U.S.-Iran situation could help ease long-term inflationary pressures. This may provide the Bank of England with more leeway to adopt a dovish stance on interest rates, as Governor Andrew Bailey has indicated that the BoE is not in a rush to hike rates and is closely monitoring data for signs of second-round inflation effects.

Broader UK political and fiscal concerns also loom large, potentially capping any bullish momentum for GBP/USD above 1.35, especially as traders eye May highs in the mid-1.36s. Thus, while the short-term outlook for sterling is positive, significant headwinds remain.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)