British Pound weakens as US Dollar gains despite easing safe-haven demand

• GBP/USD falls as the US Dollar gains support from a rebound in 10-year US Treasury yields.
• Easing tensions in the Strait of Hormuz reduces safe-haven demand following diplomatic progress between the US and Iran.
• Markets pared 2026 interest rate hike bets as the Bank of England signaled no rush to tighten monetary policy.

GBP/USD edges lower after registering modest gains in the previous day, trading around 1.3450 during the Asian hours on Wednesday. The currency pair came under selling pressure as the US Dollar (USD) gained momentum, bolstered by a rebound in the benchmark 10-year US Treasury yield, which had dipped toward 4.61% on Tuesday. That initial slide in yields was driven by falling energy prices, which helped cool inflation fears and tempered expectations of a hawkish response from the Federal Reserve (Fed).

However, the Greenback may face further challenges due to easing safe-haven demand amid building diplomatic momentum around a potential agreement to reopen the Strait of Hormuz. Qatari officials announced on Tuesday that an interim proposal had been drafted, with both Washington and Tehran signaling tangible progress toward restoring access to the critical maritime transit route. This diplomatic breakthrough follows US President Donald Trump’s decision to suspend planned military strikes against Iran, choosing instead to give negotiations space while maintaining his call for the immediate reopening of the waterway.

Sterling edges higher in quiet trade as UK Gilts lag peers

Strategists at Scotiabank observe that Sterling is "modestly firmer on Tuesday" but emphasize that trading remains constrained, with "no UK data reports this morning to drive volatility." They add that "UK Gilts are underperforming European bonds somewhat" even as "EURGBP is largely stable," underscoring the generally subdued tone in UK markets.

Last week's Bank of England (BoE) meeting reinforced expectations that policymakers are in no rush to tighten monetary policy, leading markets to dial back expectations for interest rate hikes in 2026. This dovish pivot could dampen investor demand for the British Pound (GBP), pushing the currency lower against major peers as market participants priced in lower rate expectations.

Although the BoE voted 6-3 to hold rates steady, with three members favoring a hike against expectations for a 7-2 split, Governor Andrew Bailey signaled that disinflation remains on track. Furthermore, some policymakers noted that rate cuts could be reconsidered if Middle East tensions continue to dissipate.

However, strategists at Scotiabank describe the outlook for the Pound as “neutral/bullish,” noting that Sterling “continues to chop around the 100- and 200-day moving averages (both close to 1.34) as the flat, broad range trade in place over the past few months continues to play out.” This leaves GBP/USD consolidating near these longer-term technical markers, with price action still contained within the established range.