Sterling edged up by more than 0.19% on Wednesday, leaving GBP/USD hovering near 1.3400 after rebounding from an intraday low of 1.3362. In the US, May CPI met expectations at 4.2% year-on-year, accelerating from 3.8% in April, while core CPI rose 2.9% versus 2.8% previously. Even so, the US Dollar Index (DXY) slipped 0.11% to 99.87. Middle East tensions persisted: reports of possible US-Iran common ground on uranium enrichment were offset as talks faltered following Iran’s downing of a US helicopter and a subsequent US response.
Rate expectations remained a driver. Money markets priced 22 basis points of Federal Reserve tightening by year-end, while UK pricing implied 44 basis points of Bank of England (BoE) hikes by the end of 2026. Attention turns to UK GDP on Friday, alongside US Initial Jobless Claims and the May Producer Price Index (PPI). On the chart, GBP/USD was at 1.3392, with the RSI (14) near 45 and resistance flagged at 1.3408, 1.3461, 1.3573 and 1.3869; support was cited around 1.3159.
Fed Policy Outlook and Geopolitical Risks
With US inflation now confirmed at 4.2%, we see this as reinforcing the Federal Reserve’s hawkish stance for the second half of the year. This level remains more than double the Fed’s 2% target, a situation reminiscent of the persistent inflation seen from 2021 to 2023. Consequently, interest rate futures now imply a greater than 80% probability of at least one rate hike by December, cementing the market’s pricing of 22 basis points of tightening.
The escalating conflict with Iran introduces significant volatility, primarily through its impact on energy prices. We are already seeing WTI crude futures surge past $95 a barrel on the back of these tensions, which will feed directly into future inflation reports and complicate policy decisions. This geopolitical risk premium is adding a layer of uncertainty that typically favors the safe-haven US Dollar, yet the currency is currently showing weakness.
Sterling Support and GBP/USD Trading Strategies
The key dynamic for us remains the policy divergence between the Federal Reserve and the Bank of England. While the US market is pricing in one rate hike, UK money markets have priced in 44 basis points of tightening from the BoE by year-end. This expectation that the BoE will be more aggressive in combating its own inflation is the primary reason the British Pound is holding its ground around the 1.3400 level.
Given this backdrop, we are looking at options to express a cautiously bullish view on GBP/USD, capitalizing on the interest rate differential. Buying call options with a strike price around 1.3450 for late July would allow us to profit if the pair breaks above its current technical resistance, while strictly limiting our potential downside. This strategy positions us for a potential rally driven by a more hawkish Bank of England.
Alternatively, for those of us who see the technical resistance holding in the short term, selling cash-secured puts with a strike near 1.3200 could be attractive. This strategy allows us to collect premium based on the view that the strong fundamental support from BoE rate hike expectations will prevent a significant drop below that level. It’s a way to be paid while we wait for a clearer directional trend to emerge.
