The pound is highly sensitive to developments in the oil market, but monetary policy remains a key driver. The Bank of England may raise the repo rate twice in 2026 to prevent inflation from climbing back toward 5%. Let’s discuss this topic and make a trading plan for the GBP/USD pair.
The article covers the following subjects:
Major Takeaways
- The Bank of England took a hawkish stance at its March meeting.
- The repo rate could rise to 4.25% this year.
- The pound is sensitive to events in the oil market.
- Short positions can be considered if the GBP/USD pair falls below 1.338 and 1.3355.
Weekly Fundamental Forecast for Pound Sterling
Without the conflict in Iran, the Bank of England might have cut its repo rate to 3.5% in March, easing financial conditions and making credit more accessible. Instead, concerns that inflation could accelerate to 5% by year-end led the Monetary Policy Committee to vote unanimously to keep borrowing costs at 3.75%. Following the decision, GBP/USD quotes initially surged before embarking on a roller coaster ride.
BOE Inflation Forecasts
Source: Bloomberg.
Andrew Bailey stated at a press conference that the Bank of England was ready to act to bring inflation back to the 2% target. The UK regulator expects consumer prices to reach 3.5% in March and 5% by the end of 2026. Even doves on the Committee voted for tighter policy.
Before the March meeting, the futures markets had expected the BOE to trim the repo rate to 3.25% from 3.75% this year. However, derivatives implied an 80% chance of rates rising to 4.25% and a 33% chance of an increase to 4.5% after the meeting.
Such a sharp hawkish turn could have made the pound king in the forex market if not for one major caveat. The UK economy remains fragile and highly sensitive to energy prices. The longer the Middle East conflict persists, the greater the pressure on GBP/USD quotes.
Reflecting this risk, Pantheon Macroeconomics has cut its 2026 UK GDP forecast from 1.3% to 0.6%, while KPMG and Barclays now expect GDP growth to slow to 0.7%, down from previous estimates of 1–1.1%.
Investors are increasingly factoring in a stagflationary scenario in which economic growth slows while inflation accelerates. This leaves the Bank of England in a difficult position—raising the repo rate could further weaken GDP, while cutting it risks letting inflation spiral out of control.
Meanwhile, should borrowing costs rise to the 4.25% level implied by the futures market, the UK economy may slip into a recession, as it is too fragile to endure tighter policy. This would likely weigh on the pound over the medium term. For now, market sentiment is supported by rumors of potential US–Iran talks, providing a temporary tailwind for the GBP/USD pair.
However, it may turn out that Donald Trump is mistaking wishful thinking for reality. According to estimates by Societe Generale and ANZ Research, oil prices are unlikely to return to pre-war levels of $65–70 per barrel by the end of 2026, even if the Strait of Hormuz reopens tomorrow. This scenario poses significant challenges for net-importing economies.
Weekly Trading Plan for GBP/USD
In this connection, if the GBP/USD pair drops below the support levels of 1.338 and 1.3355, short positions can be opened.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
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