GBP/USD fell below 1.3500 after gaining over 0.5% in a previous session, settling at around 1.3480 in Asian trading on Tuesday. This drop happened as the US Dollar remained stable, with caution surrounding the August 1 tariff deadline announced by US President Donald Trump. US Commerce Secretary Howard Lutnick confirmed that new tariff rates would be set on August 1, but trade discussions will continue. The British Pound is showing a slight recovery against the US Dollar, trading near 1.3480 during the American session.

Sterling Attempts Recovery

Sterling’s rise is partly due to a weakening US Dollar, impacted by low US Treasury yields and uncertainty over future trade talks and Federal Reserve policies. Expectations for UK interest rates are uncertain after mixed economic data, creating cautious optimism ahead of the Bank of England’s decision in August. In other market news, EUR/USD regained 1.1700 during the European session, and Solana hit $200. China’s second-quarter GDP showed a 5.2% year-on-year growth, but concerns about fixed-asset investment and retail sales continue. We see the recent drop below 1.3500 followed by a tentative recovery as a sign of potential volatility rather than a clear trend. Recent data indicates 1-month implied volatility for GBP/USD has risen to around 7.5%, reflecting market nervousness ahead of key events. This means option premiums are becoming more costly, making volatility-selling strategies riskier.

Central Bank Expectations

The upcoming Bank of England meeting is crucial, especially since the Office for National Statistics reported UK CPI inflation reaching the 2.0% target. Historically, hitting this target often leads to policy changes. We expect the market to fully factor in a rate cut for the August meeting, which may limit Sterling’s strength in the coming weeks. On the other hand, uncertainty about Federal Reserve policy is limiting dollar strength, as indicated by low Treasury yields. While Mr. Lutnick’s comments on trade add geopolitical risks, the CME FedWatch Tool shows a greater than 60% chance of a rate cut by September. This suggests the market is leaning toward a more dovish US central bank, preventing the dollar from rising significantly. This situation presents challenges for both central banks, making it hard to place strong directional bets. Given the mixed pressures, we believe that long volatility positions are the safest option for traders. A long straddle using options that expire after the August central bank meetings could benefit from the sharp moves likely to occur, regardless of the direction taken by the pair. Create your live VT Markets account and start trading now.

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