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Pound-Dollar faces fresh losses as U.S.-Iran tensions escalate toward a potential military showdown.
A looming showdown between the U.S. and Iran can only help the dollar.
However, should U.S. President Donald Trump back down on his threat to strike Iranian electricity infrastructure, it would signal a significant de-escalation is coming.
That would help the pound and set the dollar back.
For now though, there's enough tension to keep the pound-dollar conversion under pressure: it trades at 1.3292 on Monday as it extends Friday's 0.67% decline, and the near-term outlook suggests the market is poised to break to fresh lows.
The pair remains above the 1.3250 support line that has been established over the course of the past ten days or so, but it looks vulnerable to giving way:
GBP/USD technicals show the pair remains under pressure.
The dollar is the preferred currency during the Middle East conflict and will continue to strengthen as long as the crisis continues and until there are clear and credible signs of de-escalation.
The U.S. President has given Tehran until the end of today to reopen the Strait of Hormuz or risk strikes on the country's power generation facilities.
Iran is not backing down and said it would attack energy infrastructure in the Gulf region if the U.S. carried out its threats.
Monday has already seen Iran carry out fresh strikes across the Gulf hours before U.S. President Donald Trump's deadline expires.
The United Arab Emirates reported drone and missile attacks by Iran.
Brent crude trades at $109 / barrel, which puts it above Friday's close of 107.66; that was the highest close of the crisis to date.
Bond markets continue to come under pressure as global investors anticipate higher inflation in the outlook, with UK bonds across all tenors falling again, which squeezes their yield higher.
That climbing bond yield is a worry for the British government, as it is effectively the rate it borrows at. Rising borrowing costs mean the country's finances are deteriorating before our eyes.
Pound-dollar is understandably under pressure as a result, and will likely remain so in the coming days.
Turning back to the levels, we watch that floor at 1.3250 and make that the next short-term objective ahead of the Iran crisis low at 1.3218.
Below here and the pair is making a run for 1.30.
The downside case will be invalidated in the event that Trump pulls back from bombing Iranian electricity infrastructure in the coming hours, as it would send a clear signal he doesn't have the intention of escalating.
This would then open the door to a negotiated settlement, which is probably the market's preferred outcome and oil prices would retreat in response. The dollar would give back gains and GBP/USD would start to recover.
Also supporting GBP/USD is the recent rise in bets that the Bank of England will raise interest rates in the coming months. "A factor that is affecting gilts more than some other markets is a recalibration of policy rate expectations. A week ago there was less than one 25bp hike by the BoE priced in but following the hawkish MPC minutes this week starts with over three 25bp hikes priced by markets for the rest of 2026," says a daily market briefing from Lloyds Bank.
Above: UK two-year bond yield minues the U.S. equivalent. It shows that UK short-term bond yields are rising faster than their U.S. equivalent. In normal times, that would send the GBP/USD surging higher. For now though, at best it is providing support.
At the same time, the market judges that the U.S, Federal Reserve isn't under the same degree of pressure to raise rates.
"Fed rate expectations have adjusted too, but with Powell striking a more balanced tone and the economic fundamentals of an energy shock being different for the US, the move has been more contained. To the extent the adjustment in relative expectations for policy rates drives 10yr yields, the larger reaction to the BoE than the Fed last week explains the eye-catching spike in gilt yields," says Lloyds.
That implies that short-term bond yields have moved in favour of GBP/USD upside over recent weeks. The key is that these bond yield rises remain orderly, if the market begins to panic that they will tip the UK economy into recession, then the relationship flips and GBP/USD sells off.