Sterling may find renewed upside in the near-term as Middle East de-escalation, lower oil prices, and shifting monetary policy expectations on both sides of the Atlantic combine to support the pound against the dollar. The recent signing of the U.S.-Iran memorandum of understanding has catalysed a meaningful decline in oil prices, providing broad relief to risk sentiment and potentially alleviating persistent inflationary pressures in the UK and globally. Should the drop in oil accelerate the disinflationary trend, the Bank of England's current hawkish stance — with one rate hike priced in by the October MPC meeting — is likely to soften.

A pivot toward a more dovish BoE policy path would support GBP/USD by relieving fiscal pressures that resulted from the recent surge in UK gilt yields, which heightened market sensitivity to Britain's funding dynamics.

A more accommodative BoE outlook could additionally ease domestic political tensions, as improved UK growth prospects may strengthen Prime Minister Keir Starmer's position within the Labour Party.

On the U.S. side, lower oil and reduced inflation expectations may afford Fed Chair Kevin Warsh room to deliver the rate cuts President Donald Trump has been pressing for, which would likely weigh on the dollar and provide an additional tailwind to sterling.

For now, GBP/USD traders appear comfortable operating within the 1.33–1.35 range, with moves driven largely by U.S.-Iran headlines. Key risks remain, however. The smoldering Hezbollah-Israel conflict could derail fragile U.S.-Iran peace and reignite hostilities, while any delay in lowering UK inflation lower could revive fiscal and political concerns, potentially capping sterling gains above the 1.35 trend-high.
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(Paul Spirgel is a Reuters market analyst. The views expressed are his own)