British Pound inches higher as Iran diplomacy hopes limit US Dollar rally fuelled by hot US CPI

• Hopes of a US-Iran peace agreement restrain the safe-haven USD, drawing buyers to GBP/USD on Wednesday.
• Sterling receives further backing from the BoE’s hawkish policy outlook, helping spot prices higher.
• Prospects of a sizeable 50 bps Fed rate increase in December support USD bulls and should limit the pair’s gains.

Trading near 1.3350, GBP/USD posts modest gains in Wednesday’s Asian session after reaching a one-and-a-half-week low around 1.3300 the previous day. Although the pair has moved away from that low, the fundamental picture calls for caution before positioning for a substantial advance.

Optimism that diplomacy could bring the US-Iran war to an end continues to constrain the safe-haven US Dollar (USD), lending support to GBP/USD. At a G7 meeting on Tuesday, US Secretary of State Marco Rubio said major combat operations in Iran were unnecessary. His remarks followed comments on Monday from President Donald Trump, who said the US was maintaining the status quo in the Iran war because he currently saw no reason to escalate it.

Further support for the British Pound (GBP) and GBP/USD comes from the Bank of England’s (BoE) hawkish outlook, which signals that second-round inflation effects could necessitate additional tightening. In the US, however, Tuesday’s stronger consumer inflation figures reinforced the likelihood of a Federal Reserve (Fed) rate increase in December. Some Fed officials, including Governor Christopher Waller, also raised the possibility of a larger increase of 50 basis points (bps).

Dollar bulls gain support as Waller raises prospect of larger December hike

A 9/10 FXS Speechtracker score, comfortably above the historical average of 7.3/10, reflected the distinctly more hawkish tone of Fed Governor Waller’s remarks and his clear preference for further tightening. He explicitly left open a half-point Fed rate increase in December should October core CPI come in at around 0.3% or higher, while backing at least a quarter-point rise even if the data improve. This suggests a low threshold for further increases and a forceful policy response to any upside inflation surprise. His focus on widespread price pressures, the insufficiently restrictive current policy stance and the need for higher real rates adds to upside risks for US yields, supporting the Dollar through the prospect of diverging monetary policies.

An increase of 3.17 points took the FXS Fed Sentiment Index to 145.50, confirming a firmly hawkish Fed stance and corroborating the above-average FXS Speechtracker score. With the index so far above the neutral 100 level, its elevated reading suggests markets should assign a greater probability to further rate increases and a stronger Dollar heading into the December meeting.

Against that backdrop, USD bulls retain the advantage, and any corrective decline in the currency is more likely to attract buyers and prove limited. Strong follow-through buying would therefore be needed before concluding that GBP/USD’s recent rejection at the psychological 1.3500 level has finished playing out. Such confirmation would also be prudent before positioning for a resumption of the pair’s recovery from its year-to-date low reached in October.

GBP/USD holds above support on the 4-hour chart

Technical Outlook Remains Neutral

On the 4-hour chart, the 50.0% Fibonacci retracement and the 200-period Simple Moving Average (SMA) provide a constructive support base just beneath GBP/USD. Nearby Fibonacci resistance at 1.3365 nevertheless restricts gains, leaving the near-term outlook neutral.

The first upside barrier is the 38.2% retracement at 1.3365, ahead of more substantial resistance around 1.3419 at the 23.6% level. Initial support lies at 1.3322, the 50.0% retracement, with the 200-period SMA at 1.3314 adding reinforcement. A move below this area would bring the 61.8% Fibonacci retracement at 1.3279 into view. Should selling intensify, further support sits at 1.3217 and 1.3138.

(The technical analysis of this story was written with the help of an AI tool. Know more.)