USD/GBP volatility to continue as geopolitical strains cloud outlooks

Charting the performance of the US dollar has been a challenge for investors in recent months, with factors such as President Trump’s Liberation Day tariffs and unconventional strategies in handling geopolitical unrest carrying a profound impact on the greenback. 

The volatile nature of the dollar and its impact on other world currencies can easily be seen in the performance of USD/GBP in 2026, which has been flip flopping on the back of fresh news emerging from the conflict in Iran. 

Both currencies have been heavily impacted by the war and subsequent energy price squeeze prompted by Iran’s closure of the Strait of Hormuz, a busy shipping lane that sees 20% of the world’s oil pass through. 

The announcement of a two-week ceasefire between the US and Iran had sent the dollar tumbling as traders took stock of a far lower prospect of Federal Reserve interest rate hikes should the cost of oil return to pre-conflict levels. 

However, optimism for the ceasefire to spell the end of the conflict appears to be low, with early signs of strain leading to widespread caution. 

With Kuwait accusing Iran of launching drone strikes in recent days, we can expect to see USD/GDP continue to experience volatility as uncertainty looms over the Middle East. 

Why a ceasefire supports sterling

The position of GDP as a risk-sensitive currency, as opposed to USD as a safe-haven option, means that a ceasefire would always support sterling first, but the prospect of long-term peace in the Middle East would be a significant driver of growth for the pound against the dollar because of the implications for inflation and interest rates in the United States. 

With the cost of Brent crude oil reaching $119 per barrel at its peak since the start of the war, there have been widespread fears that the rising cost of energy would create significant inflationary pressures throughout many global economies. 

Worryingly, the OECD revised its inflation forecasts for the US economy upwards to 4.2%, a figure that would be more likely to prompt the Federal Reserve to hike interest rates as a cooling measure. 

Given how heavily US markets are impacted by interest rates, due to their impact on borrowing to support business growth, energy price hikes have sparked sell-offs while the dollar has strengthened as investors flock to bonds and yielding assets in anticipation of higher levels of interest. 

“Naturally, American markets took a hit, as investors shifted money to smaller companies and more protective assets such as mining, energy, and defence,” explained a Wealthify article covering the shock of the war. 

“The big winners of this change? The UK and Japan. Thanks to their lack of exposure to volatile tech stocks, UK markets hit multiple record highs. This was no more evident than the FTSE 100, which benefitted from its heavy weighting towards mining, energy, and defence.”

With the US Dollar Index (DXY) falling almost 1.5% in the days that followed the ceasefire, dropping to around 98.5, the prospect of peace in the Middle East is more likely to send USD/GBP closer to 0.70 in the weeks ahead. 

US jobs data is a tailwind

The dollar may find some support in better-than-expected jobs data, which offers the strongest sign yet that the economy is growing at a faster pace. 

The US Bureau of Labor Statistics (BLS) revealed that more than 178,000 jobs were created in March, representing a seismic increase on forecasts of 60,000. 

While the good news must be tapered by acknowledging that February figures were wide of the mark having been revised down to -133,000, unemployment rates had also fallen to 4.3% from 4.4%, underlining the optimism re-entering job markets. 

Pressures on GBP resistance

Following its reclaim of lost ground on the greenback, sterling appears to be seeking consolidation above 1.3500, but the dollar may be well positioned to climb higher amid the uncertain geopolitical landscape thanks to its brighter energy outlook. 

Given that the United States is now a net energy exporter, the nation is far better positioned to benefit from more oil disruption in the Strait of Hormuz. 

With news reports suggesting that the strait is still seeing far lower levels of traffic than before the conflict began, the greater levels of energy resilience in the US could support further positive USD/GBP price action. 

What’s next for USD/GBP?

The future of USD/GDP will depend on the outcome of peace negotiations between the United States and Iran. The prospect of a more drawnout conflict could be a catalyst for USD growth due to a cocktail of tailwinds for the currency stemming from its energy resilience, inflation outlook, and job market growth. 

If we see traffic in the Strait of Hormuz recover, the pound could reap the rewards of lower energy costs and the prospect of higher interest rates against the greenback. The coming days will be pivotal for the pair’s outlook for 2026.