After three weeks of losses, GBP/USD started the week near 1.3450, showing less bearish momentum. A stronger risk appetite at the week’s start weakened the US Dollar, allowing GBP/USD to benefit from this change.

Market Sentiment and UK Performance

The UK’s FTSE 1000 Index saw a slight rise, and US stock index futures increased by 0.3%. This positive market sentiment might help GBP/USD continue its daily gains. Concerns about the US situation influenced GBP/USD’s performance. US President Trump’s disagreement with Federal Reserve Chairman Powell regarding keeping rates between 4.25% and 4.50% added complexity to GBP/USD’s outlook. Traders faced challenges due to weak UK data and uncertainty in the US. GBP/USD fell to its lowest point since May at 1.3365 mid-week but managed to recover 100 pips by the end of the week. We see the reduced bearish momentum as a chance, but the mixed fundamentals make it tricky for traders. Recent UK inflation data dropped sharply to 2.3%, giving the Bank of England more reasons to consider cutting interest rates before the US does. This potential difference in policy is now crucial for the pound’s direction.

Strategies and Historical Sensitivity

The uncertainty caused by the US situation, as mentioned with Powell, remains significant. Current US inflation is stubbornly at 3.4%, making the Federal Reserve careful about loosening monetary policy too quickly. We expect this to raise implied volatility in GBP/USD options, especially during key data releases like the monthly non-farm payrolls report. With improved market sentiment in risk assets like the FTSE, we’re considering strategies that benefit from a modest rise but protect against a sharp drop. Buying bull call spreads on GBP/USD would allow us to take advantage of a short-term recovery similar to last week’s. This defined-risk strategy is sensible until a clearer trend appears. Historically, the pound is sensitive to changes in interest rate expectations before central bank meetings. With a Bank of England policy decision coming soon, we advise hedging any long positions. Purchasing inexpensive out-of-the-money put options could serve as effective insurance against any surprise dovish moves from policymakers. Create your live VT Markets account and start trading now.

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