GBP/USD has dropped slightly after rising over 0.5% the previous day. It’s currently trading around 1.3480 during Tuesday’s Asian session. The decline occurred as the US Dollar remained stable, while concerns about US President Donald Trump’s tariff deadline on August 1 increased. US Commerce Secretary Howard Lutnick confirmed that the tariff deadline is firm. Tariffs will start on August 1, but trade talks will continue. Market sentiment is also affected by worries over the Federal Reserve’s independence, with US Treasury Secretary Scott Bessent expressing concerns about the Fed’s growing responsibilities.

Market Reactions and Economic Data

Bessent has suggested a thorough review of the Fed, and President Trump’s criticism of Fed Chair Jerome Powell has led to speculation about a possible dismissal. In the UK, upcoming S&P PMI data is expected to show less decline in manufacturing and solid growth in services. The Bank of England may reduce long-dated bond sales due to decreased demand, and traders anticipate at least two rate cuts by 2025, even with lower easing expectations. The Pound Sterling, shaped by the Bank of England’s policies and economic indicators, is an important global currency. Its main trading pairs include GBP/USD, GBP/JPY, and EUR/GBP. With conflicting pressures on the currency pair, traders should brace for higher volatility rather than predict a clear direction. The confirmed tariff deadline raises significant event risks, while potential strong UK economic data may counterbalance this. This uncertainty suggests that using options strategies might be wiser than taking outright positions. Market concerns regarding upcoming trade restrictions and the criticism of Powell are already evident. This is shown in indicators like the CBOE Volatility Index (VIX), which recently jumped above 14 for the first time in weeks, indicating a rise in market anxiety. Bessent’s call for reviewing the central bank’s mandate adds to the political uncertainty, historically making the US dollar a safe haven.

Trading Strategy Considerations

On the other side, the pound is getting support from recent data, which shows the S&P Global/CIPS UK Services PMI for July holding firm at 53.0, reflecting strong growth in the UK’s largest sector. This positive economic news complicates a solely negative outlook on the pound. However, the market has factored in at least two interest rate cuts by the Bank of England by the end of 2025, limiting the currency’s long-term potential. This situation is reminiscent of the 2018-2019 US-China trade war, where headline risks caused GBP/USD volatility to increase by over 30% in just weeks. During that time, sudden and unpredictable moves became common after policy announcements. We expect a similar pattern of erratic price movements leading up to and right after the August 1 deadline. Therefore, we are preparing to benefit from significant price swings, regardless of the direction. We recommend traders consider purchasing options strategies like long straddles on GBP/USD. This involves buying both a call and a put option at the same strike price and expiry. This strategy allows traders to profit from a major move following the tariff implementation or any surprising UK data releases. Create your live VT Markets account and start trading now.

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