Executive Summary
GBP/USD trades at ~1.3440, pulled back 3.1% from a four-year high of 1.3869 reached in late January, as the Iran-US military conflict delivers a stagflationary shock to an already fragile UK economy. The Bank of England held at 3.75% on a razor-thin 5–4 vote in February, with the March 19 MPC decision now genuinely uncertain as oil above $88/bbl collides with CPI at 3.0% — the highest in the G10 — while GDP growth limps at +0.1% QoQ and unemployment has risen to 5.2%. Sterling sits in the uncomfortable intersection of needing rate cuts to support collapsing domestic demand while being unable to cut aggressively due to persistent services inflation at 4.4% and an energy-driven cost shock. The OECD PPP fair value of ~1.45 implies ~8% undervaluation, but this discount is likely to persist as long as the UK's twin-deficit, net-energy-importer profile faces an oil supply disruption. Our tactical stance is mildly bearish with low conviction (2/5), dominated by the energy shock's negative terms-of-trade impact and the BoE's inability to ease into it, while strategically we shift to neutral-to-mildly-bullish as Hormuz resolution would unlock the pre-conflict easing cycle and allow GBP to re-engage its carry advantage.