Pound-Dollar Week Ahead Predictions: Next Step Lower Looms

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The British pound is vulnerable to further weakness against the dollar in the coming days.

The coming 24 hours will be crucial for global markets as America's deadline on Iran to open the Strait of Hormuz looms, offering binary risks: dollar strength if the war escalates and dollar weakness if U.S. President Donald Trump senses Iran is willing to move towards his demands.

For GBP/USD, the 1 AM BST deadline presents immediate two-way risks.  “The ultimatum introduces a rare, time-bound geopolitical trigger with immediate global market implications," says Nigel Green, CEO of deVere Group. "There is a defined moment where the situation either stabilises or escalates sharply."

Those with USD-based payments should reach out to a currency specialist to consider setting orders to both protect against the market moving against them and take advantage of any moves in their favour.

There's a discernible pattern in pound-dollar behaviour since February: a clear downward-sloping channel in which the exchange rate takes steps lower, as if it were descending via a ladder:

That walk lower must be expected to continue against a background of persistent uncertainty surrounding events in the Middle East, where enough has already been done to ensure energy prices reset at higher levels over the coming months when compared to where we started the year.

That makes for a dollar-supportive environment and a steady trend lower in GBP/USD.

1.3160 looks to be the downside support level as we head into the new week; that's last Tuesday's low, but we can see that 1.3180 is where subsequent dips have found buyers on a regular basis.

Gains to 1.3311 are possible as long as those levels remain intact, which is where the downtrending 21-day moving average is currently located. There's been a general inability to rise above this indicator since late February, and while below here, we're in a downtrend.

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So while further GBP/USD gains are possible in the coming hours and days, they should be limited and we would be wary that ultimately the market is heading below 1.3160 over the course of the next one to two weeks.

Of course, much depends what happens in the coming hours.

The bigger steps lower tend to happen when uncertainty owing to the Iran conflict rises, and all eyes will be on the looming deadline the U.S. has placed on Iran to reopen the Strait of Hormuz. That deadline is set for 1 AM BST Wednesday.

News outlets report Iran has rejected attempts to broker a ceasefire, meaning the U.S. might have to escalate the conflict.

"Iran’s response adds another layer of uncertainty. Reports of calls for civilians to form human chains around infrastructure, alongside rejection of US-backed proposals, point to a hardening stance rather than a pathway to rapid agreement," says deVere's Green.

That offers enough fear to keep GBP/USD a 'sell on rallies' candidate.

Any unexpected outbreak of peace is a risk to that view, and a ceasefire would potentially shift the GBP/USD outlook from lower to higher.