GBP/USD fell on Monday as Middle East tensions increased, after Iran warned the US Navy against entering the Strait of Hormuz. There was also speculation that Tehran launched missiles at a US warship, and the pair traded at 1.3531, down 0.34%.
The Pound reversed earlier gains and extended a pullback from Friday’s highs above 1.3650. It moved to session lows below 1.3550 as demand rose for the safe-haven US Dollar.
Middle East Tensions Drive Safe Haven Flows
In a separate move, GBP/USD rose past 1.3600 by over 0.50% as the US Dollar weakened for a second day. This followed speculation that Japanese authorities intervened in foreign exchange markets to support the Yen.
At one point, the pair traded at 1.3650, up 0.38% and near a ten-week high. The report was attributed to the FXStreet Team, a group of economic journalists and FX specialists.
We saw this kind of push-and-pull action in 2025, where conflicting headlines created choppy conditions for the Pound. Geopolitical flare-ups in the Strait of Hormuz strengthened the safe-haven Dollar, while Japanese intervention to support the Yen weakened it a day later. This whip-saw price action last year showed us how quickly the primary driver for GBP/USD can change.
A similar dynamic is emerging now in May 2026, creating tension for the Dollar. Renewed friction in the South China Sea, through which nearly a third of global maritime trade passes, is providing a bid for safe-haven assets. This is reminiscent of the Hormuz risks we saw last year and could cap any significant upside for GBP/USD in the near term.
Central Bank Intervention Adds Another Layer
However, just as Japanese intervention battered the Dollar in 2025, we are now seeing persistent rumors that the People’s Bank of China is actively managing the Yuan’s depreciation. Any significant state-led selling of the Dollar to prop up the Yuan would create a headwind for the US currency. This leaves the greenback caught between geopolitical bids and central bank intervention flows.
On the British side of the pair, things are not straightforward, which points toward volatility. The latest UK CPI inflation data came in hotter than expected at 3.1%, making it difficult for the Bank of England to signal rate cuts. This stickiness in prices complicates the picture and could offer the Pound some underlying support.
Conversely, the US economy continues to show strength, with the most recent Non-Farm Payrolls report adding a robust 265,000 jobs. This divergence has led Fed funds futures to price in only one potential rate cut for the remainder of 2026. This policy split between a hesitant Bank of England and a hawkish Federal Reserve traditionally favors the Dollar.
Given these conflicting cross-currents, traders should prepare for increased price swings rather than a clear directional trend. Implied volatility on GBP/USD options, as measured by the Cboe Sterling Volatility Index (BPSVIX), has already ticked up to a three-month high of 9.2%. Strategies that profit from this rising volatility, such as buying straddles or strangles, may be more prudent than betting on a sustained move in either direction over the coming weeks.
