GBP/USD recovered towards 1.3235 in the Asian session, narrowing the weekly bearish gap after a modest downtick in the US Dollar, but gains were limited. Qatar and Pakistan said they had agreed a formal 60-day roadmap to secure a final US–Iran peace deal, which reduced demand for the safe-haven dollar and triggered some intraday short-covering in the pair. Even so, weekend geopolitical developments and the Federal Reserve’s hawkish tilt were flagged as potential support for the Greenback.
Later in early Asian trading, GBP/USD came under renewed selling near 1.3210, with Sterling slipping to around 1.3200 as UK political uncertainty weighed. Bloomberg reported that allies of Sir Keir Starmer expect him to set out a timetable for his departure in the coming days, fuelling reports he is expected to resign and potentially opening the way for Andy Burnham to replace him. The report pointed to the prospect of Britain moving towards its seventh prime minister in a decade.
Short-Term Recovery and the Impact of Political Chaos
We are seeing a slight recovery in GBP/USD towards 1.3235, but we believe this is a temporary bounce driven by short-term news on US-Iran relations. The major issue is the political chaos brewing in the UK with Prime Minister Starmer expected to resign. This kind of instability almost always puts pressure on the Pound.
The US Dollar’s strength is underpinned by the Federal Reserve’s firm policy stance, which seems justified by the economic data. US inflation was last reported at 3.3%, and the Fed’s own projections continue to signal only one interest rate cut for the remainder of the year. This policy difference with a UK facing a leadership vacuum makes the dollar a more stable bet.
Strategic Outlook for GBP/USD Traders
In the UK, even though headline inflation recently touched the 2.0% target, the Bank of England is holding its interest rate at 5.25% because of persistent service sector inflation. A leadership contest, potentially paving the way for Andy Burnham, brings back memories of the volatility during the 2022 leadership changes, which saw Sterling fall sharply. We saw a similar pattern when Theresa May resigned in 2019, where GBP/USD dropped over 3% in the following month.
Given this outlook, we believe derivative traders should consider strategies that benefit from a falling Pound or rising volatility. Buying GBP/USD put options with strike prices below 1.3200 could protect against, or profit from, the expected downside over the next few weeks. We also expect one-month implied volatility, currently at a moderate 6.8%, to increase significantly as the political situation unfolds, making long volatility positions like straddles potentially profitable.
