GBP/USD in a state of uncertainty: Risks remain, but market reactions are muted

GBP/USD showed little movement on Tuesday, holding steady at 1.3453. The pound remains within its established trading range as investors continue to assess the progress of negotiations between the US and Iran and their potential impact on the global economy.

Talks between Washington and Tehran are ongoing, but fresh incidents in the Persian Gulf have renewed doubts about the swift restoration of normal shipping through the Strait of Hormuz. The waterway remains one of the most important routes for global oil and gas supplies.

Oil prices rose on Monday, although Brent crude recorded its largest monthly decline since March 2020 in May, falling nearly 20%. Despite this correction, oil prices remain approximately 30% higher than pre-conflict levels, keeping inflation risks elevated.

This dynamic is particularly significant for the UK. The British economy is considerably more dependent on energy imports than the US, meaning higher oil and gas prices are transmitted more quickly into business costs and consumer spending.

The pound continues to benefit from relatively high interest rates. Earlier in the year, markets had expected two rate cuts from the Bank of England. However, following the surge in energy prices, investors have begun pricing in the possibility of further policy tightening to contain inflation.

The market is now factoring in roughly one Bank of England rate increase before the end of the year and is partially pricing in the possibility of a second move.

However, Bank of England Governor Andrew Bailey struck a more dovish tone last week. He suggested that a temporary overshoot of the Bank’s 2% inflation target does not necessarily warrant an immediate increase in interest rates. This shift in tone has reduced expectations of aggressive policy action in the coming months.

Technical analysis

On the H4 GBP/USD chart, the pair is trading within a broad consolidation range above 1.3417, currently extending up to 1.3508 and down to 1.3406. A breakout above the range could open the way for further gains towards 1.3533, while a downside breakout could pave the way for a move towards 1.3290. The MACD indicator supports this scenario, with its signal line above zero and pointing firmly upwards.

On the H1 chart, GBP/USD is trading within a narrower consolidation range around 1.3470, recently extending down to 1.3406. The next expected move is a rise towards 1.3533. The Stochastic oscillator supports this scenario, with its signal line above 50 and pointing upwards towards 80.

Conclusion

GBP/USD remains range-bound as investors weigh geopolitical risks, energy-driven inflation concerns, and the outlook for Bank of England policy. While the pound continues to draw support from expectations of relatively high interest rates, the market remains cautious, awaiting clearer signals from both policymakers and global developments.