Due to the war in Iran, the UK has become one of the developed economies for which the International Monetary Fund has made the sharpest downward revision to its growth forecast. On Tuesday, the IMF projected that the UK economy would grow by just 0.8% by 2026, a significant downgrade from its previous forecast of 1.3% and the steepest decline among the G7 nations. As the UK is heavily reliant on natural gas imports and prices have soared by 40% since the outbreak of the war, the UK government’s borrowing costs have risen accordingly. Two-year UK government bonds have become the worst-performing bonds among major economies, with yields rising by nearly 70 basis points to 4.2% since late February. Against this backdrop, traders had at one point bet that the Bank of England would raise interest rates this year. However, analysts say that as market optimism grows over the prospect of a resolution to the disruption of oil shipments through the Strait of Hormuz, some of these rate hike expectations have receded, setting the stage for a fall in the pound.

The US-Iran conflict is currently in a precarious state of détente, and the dual shipping blockades imposed by both countries on the Strait of Hormuz could reignite the conflict. Paresh Upadhyaya, Director of Market Strategy at Pioneer Investments, stated that the dollar’s valuation does not currently reflect a sufficient geopolitical risk premium—he noted that the dollar has already given back the gains it made on the back of the conflict, and that safe-haven demand could resurface should negotiations between the two countries fail. Even those bearish on the dollar believe it is unlikely to fall significantly below recent lows in the short term. Elias Haddad, Global Head of Market Strategy for the FX team at Brown Brothers Harriman, noted that the dollar remains weighed down by factors such as declining US fiscal credibility, persistent current account deficits and concerns over the politicisation of the Federal Reserve, all of which have eroded market confidence. However, during this period, various countervailing factors mean the dollar is unlikely to deviate significantly from current levels. Hadad stated: “The cyclical backdrop for the dollar will remain neutral over the next six to nine months.”

On the daily chart, the GBP/USD pair shows the Bollinger Bands widening upwards and moving averages diverging upwards, indicating that the overall upward trend remains intact. Following a bullish crossover on the MACD, the fast and slow lines have returned above the 0-line, suggesting that the price has re-entered bullish territory. The RSI stands at 63, indicating that market sentiment is predominantly bullish. On the four-hour chart, the Bollinger Bands are widening upwards and the moving averages are diverging upwards, with the price oscillating higher along the EMA12. However, the MACD fast and slow lines have formed a death cross, suggesting that upward momentum is gradually weakening; the price may pull back to the middle Bollinger Band or the EMA50 before resuming its upward movement. The RSI stands at 69, indicating that market sentiment is predominantly optimistic. The trading strategy is to go short first, then long.

Trading Recommendation

Trading Direction: Sell

Entry Price: 1.359

Target Price: 1.34

Stop-loss: 1.37

Support Levels: 1.32, 1.3, 1.28

Resistance Levels: 1.36, 1.38, 1.41