Pound Recovers as US-Iran Breakthrough Hits Dollar

Key Moments

GBP/USD rebounded from the 1.3260 area after touching its weakest level since April 7.
Dollar softness followed a US-Iran memorandum of understanding and profit-taking after a Fed-driven rally.
Cooling Bank of England tightening expectations limited the upside for the British Pound ahead of the BoE decision.

GBP/USD Edges Higher After Two-Month Low

The GBP/USD pair gained traction during the Asian session on Thursday, recovering from the prior day’s slump to its lowest level since April 7, near the 1.3260 region. The move higher saw spot prices reclaim the 1.3300 handle, supported by a modest pullback in the US Dollar (USD). However, the advance remained constrained by an overall bearish fundamental backdrop for the pair.

US-Iran MoU Triggers USD Profit-Taking

US President Donald Trump and Iranian President Masoud Pezeshkian electronically signed a Memorandum of Understanding (MoU) aimed at ending hostilities between the two countries and reopening the Strait of Hormuz. In addition, Trump noted that the 60-day negotiation period to finalize an agreement on Iran’s nuclear program is not a strict deadline, which helped bolster investor sentiment.

Improved risk appetite prompted some profit-taking in the USD after its overnight surge to the strongest level since late March, a move that had been driven by a hawkish Federal Reserve (Fed) outcome. This Dollar correction in turn provided support to GBP/USD.

Fed Outlook Supports Dollar, Caps Sterling Gains

As widely anticipated, the Fed left its benchmark overnight borrowing rate unchanged in a range of 3.5%-3.75%. The central bank substantially revised its policy statement, removing key language that had signaled a bias toward further cuts.

The median projection for the federal funds rate at the end of 2026 was raised to 3.8%, from 3.4% in the March forecasts, indicating that policymakers anticipate at least one rate increase this year. This stance could restrict the extent of the USD pullback and act as a headwind for further appreciation in GBP/USD, especially against a backdrop of fading expectations for additional Bank of England (BoE) tightening.

Fed Policy Details	Latest Outcome
Overnight rate range	3.5%-3.75%
Median fed funds rate projection for end-2026	3.8% (up from 3.4% in March)
Policy bias toward future cuts	Key language removed

Softening BoE Hike Expectations Weigh on Pound

Market expectations for BoE rate hikes eased after the UK Office for National Statistics (ONS) reported on Wednesday that headline Consumer Price Index (CPI) inflation remained unchanged at 2.8% year-on-year in May. Core inflation, which excludes food and energy, came in below consensus forecasts, rising 2.6% year-on-year in May compared with 2.5% in April.

These figures reinforced the perception that the BoE is likely to keep interest rates steady. As a result, traders appeared reluctant to build aggressive long positions in the British Pound ahead of the BoE policy announcement later in the day, limiting the potential for a more pronounced rebound in GBP/USD.

UK Inflation Metrics (YoY)	April	May
Headline CPI	–	2.8%
Core CPI	2.5%	2.6%

Pound Sterling: Background and Drivers

The Pound Sterling (GBP) is the official currency of the United Kingdom and is issued by the Bank of England (BoE). It is one of the most actively traded currencies globally and is involved in several key foreign exchange pairs, including GBP/USD (“Cable”), GBP/JPY (“Dragon”), and EUR/GBP.

Monetary Policy and Its Impact on GBP

The trajectory of the Pound is heavily influenced by BoE monetary policy decisions, which are guided by the objective of maintaining “price stability” with inflation around 2%. The primary instrument for achieving this goal is the adjustment of interest rates.

When inflation is elevated, the BoE typically responds by increasing interest rates, raising borrowing costs for households and companies. Higher rates can be supportive for GBP by making UK assets more attractive to global investors.
When inflation is subdued and signals slowing economic activity, the BoE may opt to lower rates to reduce borrowing costs and stimulate investment, which can be negative for the currency.

Economic Data and Trade Balance Considerations

A wide range of economic indicators influence GBP valuation, including GDP, Manufacturing and Services Purchasing Managers’ Indexes (PMIs), and labor market data. Robust readings tend to support the currency by signaling a healthy economy and potentially encouraging tighter monetary policy. Conversely, weaker data can put downward pressure on Sterling.

The trade balance is another important factor. It measures the difference between export earnings and import spending over a given period. A positive trade balance typically supports a currency as foreign buyers increase demand to pay for a country’s exports, while a negative balance can weigh on the currency.