GBP/USD traded in a tight range in Wednesday’s Asian session after a late rebound from the 1.3500 level, a near two-week low. The pair stayed below 1.3550 and remained under pressure.
Sterling was weighed down by UK political turmoil after over 80 Labour MPs called for Prime Minister Keir Starmer to resign following poor local election results. The US dollar held near an over one-week high after US inflation data increased expectations of a Federal Reserve rate rise.
On Tuesday, GBP/USD fell about 0.7%, dropping from near 1.3650 to test 1.3500 before recovering to around 1.3540. The move left the pair near the lower end of its recent multi-day range.
Reports also cited more than 70 Labour MPs publicly urging Starmer to step down, adding to market uncertainty. UK gilts sold off, with the 30-year yield briefly reaching 5.81%, the highest since 1998.
Attention turns to Bank of England policymaker Catherine Mann, who has said she would vote to raise Bank Rate if inflation expectations stay elevated into 2027. The BoE projects inflation to exceed 5% this year, while preliminary UK Q1 GDP is expected at 0.6% quarter-on-quarter.
Given the current strength of the US dollar, we see the British pound as vulnerable. The interest rate differential remains a key factor, with the Federal Reserve holding rates at 5.00% while the Bank of England is at 4.75%. This gap continues to attract capital towards dollar-denominated assets.
Looking back at the political turmoil in 2025, we recall how GBP/USD tested the 1.3500 level amid a leadership crisis in the Labour party. While the political landscape has since stabilized, the pound’s weakness is now driven by economic fundamentals rather than Westminster drama. The current exchange rate hovering around 1.2650 reflects this persistent pressure.
The UK’s economic picture provides little reason for sterling optimism in the coming weeks. Recent data showed UK inflation remains sticky at 2.8%, still well above the Bank of England’s 2% target. This forces the BoE to maintain a restrictive policy, which in turn stifles economic growth prospects and weighs on the currency.
Conversely, the US economy continues to show resilience, justifying the Fed’s hawkish stance. The latest Non-Farm Payrolls report added a solid 210,000 jobs, and last month’s core PCE inflation came in at 3.1%. This robust data reinforces the market’s belief that the Fed will be one of the last major central banks to cut rates.
For derivative traders, this environment suggests that betting against the pound remains a viable strategy. We believe buying GBP/USD put options with strike prices below 1.2600 offers a clear directional play on further sterling weakness. This allows for profiting from a downward move while strictly defining the maximum risk to the premium paid.
Another approach is to sell out-of-the-money GBP/USD call options, perhaps with a strike price around the 1.2750 resistance level. This strategy is for those who believe the pound has limited upside potential and will likely trade sideways or drift lower. The aim is to collect the option premium as it decays over time, provided the pair stays below the chosen strike price.
