The Pound Sterling fell by 0.18% during the North American session as the US Dollar strengthened following tariffs imposed by US President Donald Trump. Even with a positive trend in stocks, the FX market remained unchanged, with GBP/USD trading at 1.3453. Demand changes for risk-related assets caused the GBP/USD pair to drop to nearly 1.3450 during Monday’s European session. This level marked the lowest point in three weeks amidst trade tensions between the US and the EU.

Bearish Phase Starts

In the Asian session, GBP/USD entered a bearish phase, stabilizing around 1.3500, just above the three-week low reached on Friday. Market indicators suggest that the pair may continue to decline. Given the bearish pressure on the pound, we believe this signals the start of a larger movement. Derivative traders should prepare for further weakness in the coming weeks. The drop below 1.3500 is not just due to dollar strength caused by trade policy; it reflects a fundamental re-evaluation driven by differing central bank expectations. We see the easiest path ahead as downward, and derivative strategies should be adjusted to reflect this. We are closely watching the significant differences in monetary policies. The Bank of England recently observed UK inflation hitting its 2% target for the first time in nearly three years. While the Monetary Policy Committee (MPC) voted to keep rates at 5.25%, the door is now open for a rate cut in August. Currently, markets estimate a greater than 60% chance of a cut by that meeting. In contrast, the Federal Reserve’s latest predictions indicate only one rate cut in the US this year. This policy gap is the main driver, leading capital to flow towards higher yields, which creates ongoing pressure on the pound against the dollar.

Difference in Monetary Policy

Historically, periods of significant central bank divergence, like those seen in 2014-2015, have resulted in prolonged trends in currency pairs. We think a similar situation is developing now. Traders expecting this trend should consider buying GBP/USD put options with strike prices aimed at the 1.2600 level initially. This approach allows for defined-risk profit from continued declines. For those willing to take on more risk, opening short positions in the futures market offers a more direct way to gain exposure. The upcoming UK general election on July 4th adds another layer of uncertainty, reflected in rising implied volatility. This makes volatility-based strategies, like long straddles, appealing for traders anticipating a significant price movement but unsure of the immediate direction after the election. Additionally, data from the CFTC indicates that large speculators are reducing their net long positions on Sterling, signaling a shift in institutional sentiment. We view the recent consolidation as a pause before the next drop, providing an opportunity to establish bearish positions before the market fully adjusts to a new, lower trading range for the pair. Create your live VT Markets account and start trading now.

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