Sterling is likely to face continued volatility, within its recent slight range, with limited upside potential, as traders grapple with geopolitical tensions and a potentially hawkish Bank of England stance at this week's policy meeting.

Investors expect the BoE to hold UK interest rates steady this week, so they will focus their attention on policymakers' post-meeting commentary about persistent British inflation. The ongoing conflict in the Middle East, coupled with a significant surge in oil prices since the onset of the Iran war, has contributed to expectations of two potential 25 basis point rate hikes in 2026, likely in the second half of the year, to combat inflation. Political uncertainties are further complicating the GBP/USD outlook, with UK local elections approaching while Prime Minister Keir Starmer faces a possible parliamentary probe over the appointment of former ambassador to the U.S. Peter Mandelson.

From a technical perspective, GBP/USD is currently trading around 1.3555, with immediate support at the 10-day moving average of 1.3527 and psychological support by 1.35. A deeper pullback could see the pair targeting the recently bruised 100-DMA at 1.3464, while robust resistance levels are at 1.3599, the recent trend high on April 17, and the Upper Bollinger Band near 1.3640.

In the absence of easing tensions and a sudden drop in UK inflation expectations, the recent high of 1.3867 set in January is likely to remain out of reach.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)