The Pound Sterling (GBP) dropped to around 1.3400 against the US Dollar (USD) during the European session on Monday. This fall happened as the US Dollar gained strength after a new trade framework was announced between the US and the EU. The US Dollar Index approached 97.90. The trade deal with the EU cuts baseline tariffs on imports from Brussels to 15%, which is half of what was previously suggested. This trade agreement has increased interest in riskier investments. However, risk-sensitive currencies are struggling to benefit from the US Dollar’s improved outlook. The deal has eased concerns about the upcoming tariff deadline on August 1, with the US securing agreements with several trading partners, excluding Canada and Mexico. US-China trade talks in Stockholm are expected to extend their tariff pause for 90 days past August 12. According to the South China Morning Post, Washington and Beijing may reach an agreement. The Pound Sterling is gaining against other currencies, except the US Dollar, despite a quiet economic calendar in the UK. Market expectations are leaning toward a 25 basis point interest rate cut by the Bank of England, influenced by a slowdown in the UK job market. Federal Reserve announcements on Wednesday could affect the GBP/USD pair. The Fed is likely to keep interest rates steady, and investors will closely watch comments from Chair Jerome Powell for clues about future monetary policy. The Pound is still pressured against the US Dollar, trading below its 20 and 50-day Exponential Moving Averages (EMAs). A Head and Shoulders chart pattern suggests a bearish outlook, with the neckline close to 1.3413 and key support at 1.3140. Given the strengthening US Dollar, we expect that market traders will see further declines for the Pound. The US Dollar Index has recently surpassed 106, its highest in several months, as the new trade deal with the EU has removed significant economic uncertainty. This renewed faith in the US economy benefits the Dollar. The positive trade outlook also influences the anticipation surrounding the talks with China, which should further ease global risk. Typically, when US trade uncertainties decrease, capital first flows into dollar-denominated assets before moving to riskier currencies. This helps explain why the Dollar is outperforming even in a risk-accepting environment. Conversely, the Pound shows signs of weakness. Recent data from the Office for National Statistics reveals that UK wage growth has slowed for the third month in a row, reinforcing expectations of a Bank of England interest rate cut. This difference in policy direction compared to a stable American central bank creates strong challenges for the Pound. We are closely monitoring the monetary policy announcements on Wednesday for insights. The CME FedWatch Tool indicates that markets expect over a 90% chance of stable interest rates, making the Chair’s remarks particularly significant. His comments will be analyzed for any potential changes in the central bank’s future policy. Given the bearish Head and Shoulders chart pattern, this presents a clear opportunity to position for further declines. Traders can consider buying put options on the GBP/USD pair with strike prices below the 1.3400 neckline, allowing for profits if prices drop toward the key support level. A clear break below the 1.3140 support level would confirm negative momentum and likely lead to more selling. From historical price movements, the next major support area is around the important psychological level of 1.3000. We would see a break of the current support level as a signal to increase short positions.

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