Oil decides USD/GBP trajectory as inflation fears drive central bank caution

USD/GBP has continued its slide since early April, owing largely to central bank uncertainty about the impact of the war in Iran on inflation and energy costs. Thursday, April 30, brought a cocktail of economic news that underlined a cautious tone by both the Fed and Bank of England (BoE). 

The past four weeks have brought a 2.8% decline in the pair, as unrest in the Middle East continues to be a driving force for volatility. 

But while both the United States and the United Kingdom took stock of inflation updates in recent days, the underlying cause of the cautious outlook, the energy challenges posed by the closure of the Strait of Hormuz, took center stage. 

Energy steering USD/GBP

For forex traders, USD/GBP has been trading as a proxy for crude more so than rate differentials, although the impact of energy disruptions has also had a direct impact on monetary policy on both sides of the Atlantic. 

Over the past week, the pair has shown a strong correlation with Brent, sitting between 0.96 and 0.97. This means that as the price of crude rises, so too does USD/GBP and vice versa. With correlations closer to 1 indicating a complete correlation, current trends highlight how closely the dollar moves with the price of oil. 

Although price fluctuations in crude, which rose briefly by almost 7% to a four-year peak of $126 a barrel, were driven by news that the US military is set to brief President Donald Trump on new plans for possible action in Iran. 

“Oil prices rose due to concerns about supply, making energy the only clear sector to see gains,” noted a Wealthify summary of last month. “Stocks fell across the board: with the US, Europe, UK, and Asia all declining, switching regions offered little in the way of protection.”

“The Federal Reserve held rates in March, but higher oil prices and inflation worries shed doubt on potential rate cuts. As a result, bond prices fell. In the UK, increased inflation pressure and a weakening labour market added to the likelihood of continuing high rates from the Bank of England (with the possibility of a raise later in the year).”

This relationship between energy costs and USD/GBP is dominant, driving broader sentiment and taking focus away from earnings. But rate differentials are similarly moving in response to the conflict in the Middle East, with recent central bank announcements providing a strong insight into the mindset of monetary policy that could decide the future of both the greenback and the pound. 

Rates drive cautious optimism

Thursday, April 30, 2026, saw a flurry of central bank announcements that carry a significant impact on USD/GMT. 

To kick things off, the Bank of England opted to hold its interest base rate at 3.75%, while pointing to the war in Iran as a possible catalyst for future rate hikes, due to possible inflationary pressures emerging later down the line. 

While rates were held in the UK by a vote of 8-1, the BoE suggested that future rises were likely, with the possibility of ‘forceful’ rises later on. 

We also saw the US deliver its March Personal Consumption Expenditures Price Index (PCE), which saw rates fall slightly below expectations at 3.5% compared to forecasts of 3.6% by economists. 

With volatile food and energy costs factored out, the Federal Reserve’s preferred measure of inflation increased 3.2%, which is in line with expectations. Once again, this highlights the unpredictable impact of the geopolitical landscape in the Middle East. 

Impressively, another release of data on Thursday found that weekly US jobless claims fell to 189,000, their lowest figures in more than five decades, pointing to a continued revival of the job market and the possibility of further economic recovery in the United States. 

Although this would point to strength for the dollar against the pound, the likelihood of future rate hikes from the BoE is set to be a major catalyst for growth for investors. 

With expectations high for a rate hike in the UK, sentiment appears to be different in the US despite higher inflation rates due to the war in Iran. Although the Fed opted to hold its rates in recent days, some banks like Capital One Financial, Synchrony Financial, and Marcus by Goldman Sachs opted to lower their percentage yields on high-yield savings accounts. 

This points to fundamental disparities between the monetary outlook on either side of the Atlantic, which forex traders should monitor closely. 

What’s next for USD/GBP?

The possibility of a hawkish reversion from the Bank of England, driven by energy price inflation, is likely to put downward pressure on USD/GDP in the weeks ahead, but the deciding factor will be the handling of the conflict in Iran and the ongoing closure of the Strait of Hormuz. 

If protracted war continues to create energy uncertainty, we’re likely to see the BoE act decisively in hiking rates, while the Fed could continue to see pressure from the president to lower rates despite external energy pressures. 

In a volatile and uncertain landscape, a long-term conflict in the Middle East could push USD/GBP down to 0.71, while pressure for interest rate cuts is likely to drive a continuation of the greenback’s long-term slide against its peers.