GBP/USD is currently hovering around 1.3410 for the third consecutive session, facing pressure from a stronger US Dollar. This rise in demand for the US Dollar is fueled by increased geopolitical tensions between Israel and Iran, along with market anticipation for the Bank of England’s policy updates. In May, the UK’s Consumer Price Index (CPI) inflation decreased to 3.4%, down from April’s 3.5%. However, this rate is still above the Bank of England’s target of 2%. Markets expect about 48 basis points of rate cuts from the BoE by the end of the year. The Federal Reserve kept its interest rates unchanged, as expected. Traders now anticipate around 50 basis points of rate cuts by late 2025. Chair Jerome Powell warned that future rate cuts will depend on improvements in labor and inflation data.

Narrow Range Trading

On Wednesday, GBP/USD traded within a tight range around 1.3450, showing modest gains after the Federal Reserve’s interest rate announcement. The Fed’s approach demonstrates its commitment to monitoring its dual mandate while planning to reduce Treasury holdings. As GBP/USD remains in the 1.3410–1.3450 range for several sessions, the market is hesitant to move in either direction without stronger reasons. This consolidation indicates a balance between the US Dollar’s strength and the UK’s softer inflation data. The decline in UK CPI to 3.4%—still above the 2% target—means monetary policy is somewhat restrained but not urgent, allowing some flexibility for authorities without causing quick market reactions. Markets are settling on nearly two rate cuts in the UK by year-end, with 48 basis points implied. This expectation fits a more cautious central bank approach, likely waiting for additional months of disinflation data before acting. As long as the CPI stays above the target, market pricing may shift, though pressure seems to be easing.

Geopolitical Impact

In the US, while Powell maintained rates during the latest meeting, the overall outlook remains stable. The focus is firmly on economic data for any future changes, as core inflation and employment figures are key indicators. The Fed is committed to managing inflation and ensuring stable employment while also planning to reduce Treasury exposure. Although this dynamic hasn’t significantly lifted the Dollar yet, it does provide some support. Moving forward, we need to consider the pace of disinflation. Short-term sterling futures may be overestimating how quickly rate cuts might happen, especially if wage growth remains strong or inflation in services remains high. It’s premature to heavily invest in rate-sensitive assets without more evidence from upcoming CPI data. The low volatility in GBP/USD, seen in its narrow trading range, offers limited opportunities for directional trading right now. Instead, we’re focusing on relative rate expectations and closely monitoring implied volatility in forward contracts. The US Dollar maintains a modest demand amid geopolitical tensions and a less urgent Fed, which could lead to further downside for the pound if BoE members adopt a more cautious stance. Additionally, geopolitical news is still causing short bursts of volatility in the Dollar, especially related to safe-haven flows. If these tensions ease or if new UK data surprises, the current balance could change rapidly. Recent developments highlight the importance of staying alert to cross-asset signals—especially from bond markets—to determine whether this stabilization phase will lead to a breakout or a reversal. For now, we are assessing risks in options pricing, particularly for sterling puts, while observing if realized volatility aligns more closely with implied levels. The daily fluctuations remain minimal, but the increase in open interest around mid-year options indicates that many are positioning for a significant move before the summer ends. Create your live VT Markets account and start trading now.

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