The British pound posted another bearish week, marking a second consecutive weekly decline for the GBP/USD pair, with geopolitical concerns rather than domestic factors acting as the primary driver. At present, market participants do not expect the Bank of England to resume rate cuts this year; instead, markets are pricing in around 50 basis points of tightening by year-end.

Supported by rates, but fragile underneath

Sterling has shown a reasonable degree of resilience recently, but the underlying picture appears more fragile.

On the surface, the move seems justified, as markets have sharply repriced expectations for Bank of England policy shifting from anticipating rate cuts to the possibility of further tightening. This shift has provided strong support for the pound, helping it outperform most G10 currencies, with the exception of the US dollar and commodity-linked currencies.

However, this support is largely driven by a single factor.

Interest rates are the primary driver

The pounds resilience is largely a rate-driven story.

UK short-term bond yields have moved sharply higher, as markets quickly abandoned easing expectations and shifted toward the possibility of additional tightening. Inflation risks particularly those stemming from rising energy prices have taken center stage.

This repricing has helped stabilize sterling, even as the broader macroeconomic backdrop remains far less convincing.

And herein lies the key issue: much of this support now appears to be already priced in.

A less comfortable macro backdrop

Looking at the broader picture, the UK economy still appears vulnerable.

Growth was already relatively weak before the latest geopolitical shock, and the economic mix is now tilting more clearly toward a stagflationary scenario, with inflationary pressures rising again while economic activity slows and the labor market begins to soften.

At the same time, familiar structural concerns have resurfaced, including the UKs current account deficit and the economys sensitivity to higher borrowing costs.

This is where things become more complicated. While higher short-term interest rates typically support a currency, rising long-term yields tell a different story. The recent increase in UK gilt yields reflects growing concerns about fiscal sustainability and funding costs factors that have not historically supported the pound.

Positioning improves, but lacks conviction

Investor positioning also plays an important role. Speculative accounts have clearly reduced bearish bets on sterling, with net short positions narrowing over the past three weeks. However, price action has not strongly confirmed this shift, with GBP/USD trading around the 1.33001.3400 range without meaningful upside.

This combination is telling. What we are seeing appears more like gradual short covering rather than the establishment of genuine bullish positions. Investors are stepping back from negative bets but have yet to commit to long-term long positions.

Declining open interest reinforces this view, indicating position reduction rather than fresh inflows.

The conclusion is relatively clear: positioning has become less negative, but not yet positive. If prices fail to follow through with stronger gains, this adjustment could lose momentum especially if economic conditions deteriorate or the US dollar strengthens further.

Energy and political risks in the background

In the background, two key risks are gradually building.

The first is energy. Prices are expected to rise, as the UK imports more than it exports, complicating the balance between inflation and growth and keeping stagflation risks elevated.

The second is political. With UK elections approaching, political noise is likely to intensify. Any shifts in expectations around fiscal policy or political leadership could quickly impact gilt markets and, by extension, the currency.

What comes next for GBP/USD?

Base case: range-bound with a slight downside bias

The pair is likely to continue trading within the 1.32001.3500 range, with a mild downside bias. While the repricing of Bank of England policy continues to provide some support, its momentum is beginning to fade as markets question how far tightening can go in a weak growth environment. Meanwhile, the US dollar remains relatively firm.

Bullish scenario: requires a clear catalyst

A meaningful upside move would require a shift in conditions. The dollar could weaken if US data comes in softer than expected or if the Federal Reserve signals a more dovish stance. This could allow the pair to break above 1.3500. Stabilizing energy costs or an improvement in global risk sentiment could also help, potentially turning improved positioning into sustained long accumulation.

Bearish scenario: risks skew to the downside

The downside path appears more straightforward. If the dollar continues to strengthen, geopolitical tensions escalate, or UK gilt markets come under further pressure, the pound could weaken. A sharper economic slowdown or rising fiscal concerns could push the pair toward the 1.30001.3100 range, particularly if bearish positioning begins to rebuild.

What to watch

The most immediate driver remains the trajectory of the US dollar, particularly through interest rate movements and Federal Reserve policy expectations. Other key factors include oil price dynamics, developments in the Middle East conflict, volatility in UK gilt yields, and incoming UK economic data especially on growth and the labor market.