GBP/USD rebounded in Thursday’s Asian session after touching its lowest level since 7 April, with the pair lifting from around 1.3260 and reclaiming 1.3300 as the US Dollar edged lower. The dollar pullback followed an electronically signed Memorandum of Understanding between US President Donald Trump and Iranian President Masoud Pezeshkian to end hostilities and reopen the Strait of Hormuz, while Trump also said the 60-day negotiation window for a final agreement on Iran’s nuclear programme is not a hard deadline. That shift spurred USD profit-taking after a Fed-driven rally had taken the currency to its highest level since late March, though the pair’s upside was described as capped by a bearish fundamental backdrop.
Earlier, Sterling had come under pressure after UK inflation undershot expectations and a hawkish Fed decision amplified the move. GBP/USD had hovered near 1.3400 before sliding about 140 pips, breaking 1.3350 and 1.3300 to a session low near 1.3250. UK CPI for May rose 0.2% month-on-month versus 0.4% expected, core annual inflation eased to 2.6% against a 2.7% forecast, and headline annual inflation held at 2.8%, leaving markets to adjust BoE rate-cut expectations.
Temporary Sterling Rebound Driven By Geopolitics
We view the current bounce in GBP/USD as a temporary reaction to geopolitical news rather than a change in the fundamental trend. The move away from the 1.3260 low is driven by a short-term dollar dip from the Iran deal, creating a potentially misleading signal. This brief strength presents an opportunity to position for what we expect to be a resumption of the downtrend.
The underlying weakness in the British Pound is clear following the miss on UK inflation data. A similar situation occurred in late 2023, when softer-than-expected CPI numbers caused markets to rapidly price in Bank of England rate cuts, sending Sterling lower. With core inflation now easing to 2.6%, we anticipate the market will continue to bet on a more dovish BoE in the coming weeks.
Positioning For Further GBP/USD Weakness
Conversely, the Federal Reserve’s hawkish stance provides a strong pillar for US dollar strength. History shows that policy divergence is a powerful driver; in 2022, the Fed’s aggressive hiking cycle propelled the U.S. Dollar Index (DXY) to a 20-year high. This ongoing contrast between a firm Fed and a softening BoE should weigh heavily on the GBP/USD pair.
Given this backdrop, we should consider buying GBP/USD put options with strike prices below 1.3200. This strategy allows us to profit if the pair reverses its current gains and breaks below its recent two-month low. Using puts offers a defined risk, limited to the premium paid, which is prudent given that implied volatility has likely increased.
Alternatively, selling out-of-the-money call options or establishing bear call spreads with strikes around the 1.3400 level could be an effective strategy. This approach capitalizes on the view that the pair’s upside is capped by the weak UK fundamentals and a strong dollar. This is a good way to collect premium if we believe the pair will trade sideways or move lower from here.
