File image of President Donald Trump. Official White House Photo by Daniel Torok.
The pound-dollar exchange rate climbed to 1.36 in early May, the highest level since mid-February, before slipping back to 1.3575 in Tuesday trade.
Although Sterling is up 2.59% on the year it struggles to maintain a hold above 1.36. That repeated rejection tells us there is enough concern around to stop the pound from breaking out.
Two things are behind that concern: the Iran war and what happens to the under-fire Prime Minister, Keir Starmer.
Shipping traffic in the Strait of Hormuz remained at a standstill on Tuesday, with oil rising after US President Donald Trump rejected Iran’s latest offer and suggested the ceasefire may not hold.
Speaking to reporters in the Oval Office, Trump called Iran’s response to his proposal a “piece of garbage” and said the ceasefire was on “life support.”
That is not the kind of language that inspires confidence in sterling, and price action across spread betting, futures and CFD markets confirms it. Reports show that investors have grown more cautious as they move money into the dollar due to its status as a safe-haven currency.
Trump went on television on Saturday and said he would restart strikes on Iran if Tehran “misbehaves.”
Iran’s foreign minister responded by saying his country was ready to talk, but only if Washington was willing to change course. Neither side has budged on the Strait of Hormuz as Brent crude stays north of $100 a barrel.
Political risks are meanwhile growing as Thursday’s local elections triggered a cascade of political uncertainty, which leaves Prime Minister Keir Starmer on Tuesday fighting for his political life.
One-week implied volatility on the pound has risen to 6.4%, according to LSEG data.
Speculators have been building short positions on sterling for weeks now. Desjardins said on April 22 that they see Labour taking a beating at the polls, bad enough to spark a challenge against Starmer’s leadership.
What worries the market is what comes after. If a more left-leaning figure like Angela Rayner takes over, the fiscal rules that keep borrowing in check could be loosened. Even if Starmer survives, he might feel he has no choice but to tack left to keep rivals at bay. Either scenario means more pressure on gilt yields and less support for the pound.
“The dollar’s overvaluation would persist as long as US equity markets continue to deliver strong returns and US bonds continue to offer a very attractive package of high yield alongside value as a hedge for private-sector portfolios,” said Kamakshya Trivedi, head of Global Foreign Exchange, Interest Rates, and Emerging Markets Strategy Research at Goldman Sachs Research.
Back in May 2025, Goldman projected the pound would hit 1.39 in 12 months. We are already at 1.36 in early May 2026, so the target does not look unrealistic. TD Bank agrees and has the pound as a buy against the dollar this year, targeting 1.39 by December on the back of broad dollar weakness.
“Strength in sterling is more likely to come in the first half of the year, with the second half
seeing fiscal fears coming back into focus ahead of the next budget,” said James Nelligan, an FX strategist at J.P. Morgan, concerning the 2026 global market outlook.
Those forecasts might well prove right over the longer run, but the next few weeks look tricky. Until something gives on Hormuz and the political fog around Westminster clears, the pound looks stuck below 1.36 resistance. That ceiling is doing its job.
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