GBP/USD spiked towards 1.3450 at the week’s open as a US–Iran ceasefire and the reopening of the Strait of Hormuz pushed crude down close to 5% and buoyed risk-sensitive currencies. The move then fully retraced, leaving spot back near 1.3400 as the Dollar stayed supported into Wednesday’s Federal Reserve meeting. The ceasefire is framed as a 60-day extension, with Iran’s nuclear programme deferred and formal signing due Friday, which helped keep broader risk appetite contained after much of last week’s positioning.
US data were soft but did little to dent the greenback: the New York Empire State Manufacturing Index fell to 5.7 in June from 19.6, versus a 14 consensus, while May Industrial Production rose 0.1% against a 0.3% forecast. The Fed is expected to hold 3.50% to 3.75%, after May NFP came in near 172K with unemployment around 4.3%; futures imply a December hike probability near 57%, and by January a hold is roughly 35%. Technically, the pair is compressed between the 200-period EMA near 1.3400 and the 50-period EMA just under 1.3450, about 40 pips apart, with Stoch RSI near 44. Tuesday brings Building Permits and Housing Starts near 1.42 and 1.43 million, then UK CPI at 06:00 GMT (2.8% YoY headline; core seen 2.7% from 2.5%), US Retail Sales at 12:30 GMT, and the Fed at 18:00 GMT with a 18:30 GMT press conference; the BoE follows Thursday. Levels cited are resistance at 1.3450 then 1.3500 and 1.3550, with support at 1.3400 then 1.3350.
Short-Lived Sterling Rallies and the Focus on the Fed
We saw the pound get a brief lift toward 1.2800 on signs of a thaw in EU-China trade relations, but that optimism faded fast. The move unwound completely, showing how shallow these risk-driven rallies are. The market’s real focus remains squarely on this week’s Federal Reserve meeting.
The dollar isn’t waiting for a green light to push higher, and it’s easy to see why. The latest US inflation reading for May came in at a sticky 3.1%, and the economy added a solid 195,000 jobs. With numbers like these, we see traders reducing their short-dollar bets ahead of Wednesday’s Fed decision.
We expect the Fed to hold rates steady at their current 4.50% to 4.75% range this week. The real action will be in the updated “dot plot” and the Chairman’s tone, which will signal plans for the rest of the year. History shows us that even a small upward shift in rate projections can send the dollar sharply higher.
GBP/USD Technicals and Trading Strategy Ahead of Central Banks
Looking at the charts, we see GBP/USD coiled in a very tight range, which suggests a big move is coming. The pair is pinned between its 200-day moving average providing support near 1.2720 and the 50-day average capping it at 1.2780. Such compression often precedes a sharp breakout, with the Fed decision being the likely trigger.
For us, this setup screams for using options to trade the potential volatility breakout around the Fed announcement. We are considering buying straddles or strangles to profit from a sharp move in either direction, as the direction itself is uncertain. Key levels to watch are a break below support at 1.2720 or a push above resistance at 1.2800.
We must also remember the UK side of the equation, with the Bank of England meeting on Thursday. With UK inflation running hotter than in the US at 3.5%, any surprise hawkishness from the BoE could complicate the trade. However, for now, the Fed remains the primary driver for the pair this week.
