• GBP/USD rebounds from a multi-month low on Tuesday and snaps a five-day losing streak.
• A modest USD pullback from the YTD peak turns out to be a key factor supporting the pair.
• Geopolitical uncertainties and hawkish Fed bets should limit USD losses and cap spot prices.

The GBP/USD pair stages a modest recovery from the 1.3160-1.3155 area, or over a four-month trough touched during the Asian session this Tuesday, and for now, seems to have snapped a five-day losing streak. Spot prices rally back above the 1.3200 mark in the last hour, though the upside seems limited on the back of escalating Middle East tensions.

US President Donald Trump suggested on Monday that significant progress had been made in talks aimed at ending US military operations in Iran. Trump also indicated that an agreement was still likely with what he described as a more reasonable regime in Iran. Trump, however, issued a stark warning that the US could launch massive strikes on the Islamic Republic's key energy infrastructure if a deal is not reached soon and if the Strait of Hormuz is not immediately reopened to commercial traffic.

In response, Iran signaled reluctance to engage with the US, highlighting fragile diplomatic progress and dampening hopes for de-escalation of tensions in the Middle East. This remains supportive of elevated energy prices, fueling inflation concerns and hawkish US Federal Reserve (Fed) expectations. In fact, traders are now pricing in over a 50% chance of a rate increase by the Fed in 2026, which pushed the US Dollar (USD) to a fresh year-to-date high this Tuesday and should cap the GBP/USD pair.

Meanwhile, the UK economy is highly vulnerable to energy price shocks linked to the Iran war. Furthermore, the Bank of England's (BoE) hawkish signal about a potential interest rate hike as early as April amid inflation fears raises downside risks to the economy. This, in turn, might hold back traders from placing aggressive bullish bets around the British Pound (GBP) and contribute to keeping a lid on the GBP/USD pair, warranting caution before positioning for any meaningful recovery.

Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have formed a near-term bottom as traders look to the final UK GDP print for some impetus. Later during the North American session, the US JOLTS Job Openings, along with the Conference Board's US Consumer Confidence Index, might influence the USD and produce short-term opportunities around the GBP/USD pair. The focus, however, will remain glued to geopolitical developments.