Sterling strengthened against the US dollar on Tuesday, with GBP/USD at 1.3384 after troughing near 1.3330, as the market waited for US inflation data. The pound was up 0.31% while the dollar pared earlier losses, even as risk appetite softened and Middle East tensions remained in focus following US President Trump’s call on Israel and Iran.
Elsewhere, the pair was quoted around 1.3390 at the time of writing, up 0.42% on the day, helped by a weaker USD after confirmation that direct attacks between Israel and Iran had ceased. The calmer backdrop reduced demand for safe-haven assets, though trading was described as choppy, with GBP/USD oscillating around the mid-1.3300s after a modest rebound from the 1.3300 area, which marked a more than three-week low. Despite the softer dollar, the broader fundamental backdrop was characterised as limiting upside follow-through in the near term.
Market Positioning Ahead Of US Inflation Data
We see the Pound consolidating around the 1.2650 level as traders hold back ahead of a key event. The upcoming US Consumer Price Index (CPI) report is the main focus, as it will heavily influence the US Dollar. A softer inflation number could pressure the greenback further.
We are watching for the CPI data to come in below the forecast of 2.9%, which would be a drop from last month’s 3.1% reading. Such a result would likely increase market bets on a Federal Reserve interest rate cut in July, with futures markets already pricing in a 65% probability. This expectation is keeping a lid on any significant US Dollar strength.
Policy Divergence And Volatility Expectations
On the other side of the pair, we note that UK inflation remains sticky, with the latest figures showing a 3.5% annual rate. The Bank of England has signaled it may need to keep interest rates higher for longer to combat persistent wage growth. This policy divergence from the US Federal Reserve is providing a floor for the Pound Sterling’s value.
Given the uncertainty, we believe implied volatility on GBP/USD options will likely rise heading into the data release. Traders might consider strategies that benefit from a sharp price move in either direction to capture the expected post-announcement swing. Historically, a significant deviation from the consensus inflation forecast has caused moves of over 100 pips in the pair within hours.
