GBP/USD faces continued near-term pressure, with the pair likely to remain confined to the lower end of its recent 1.33–1.35 trading range as geopolitical volatility, divergent central bank trajectories, and persistent inflation concerns weigh on sentiment.

Sterling dipped toward the lower end of this range, in Monday trading, amid escalating Middle East tensions, underscored by last night's missile exchange between Israel and Iran — a reminder of the fluid risk environment currently in markets. Simultaneously, increasingly hawkish U.S. Federal Reserve rate expectations for 2026 have added headwinds for GBP/USD relative to the dollar. On the domestic front, Bank of England (BoE) rate expectations have softened modestly, with MPC members proffering caution on further tightening. The recent MPC decision to hold rates came in an 8-1 vote, with one member voting for a 25 basis point hike to address persistent UK inflation — a signal that price pressures remain a live concern. BoE Governor Andrew Bailey noted in April that rising oil prices have exacerbated inflation expectations, flagging the need to watch for second-round effects before hiking rates.

This creates a difficult dilemma for sterling. A further escalation in Middle East hostilities could drive oil prices higher, worsening already well-above-target UK inflation and potentially forcing the BoE into a faster and steeper rate trajectory. Paradoxically, such tightening could further constrain sluggish UK growth, amplifying fiscal and political concerns and ultimately weighing on the pound.

The 1.33–1.35 range appears likely to hold in the near term, supported by these offsetting forces. However, any resurgence of Middle East hostilities could embolden sterling bears to test the downside, making geopolitical developments and BoE communications the key variables to monitor.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)