GBP/USD fell by 0.18% in the North American session, trading at 1.3453. This drop came after US President Donald Trump introduced 30% tariffs on imports from the EU and Mexico, which initially hurt market sentiment. US inflation is expected to rise to 2.7% year-over-year, influenced by these tariffs. Excluding food and energy, inflation could reach 3% YoY. This situation is putting pressure on the Federal Reserve, with some officials anticipating at least two rate cuts by 2025.

UK GDP and CPI Analysis

In the UK, GDP data indicated an economic slowdown, increasing the likelihood of potential rate cuts by the Bank of England. The market is now waiting for UK CPI figures; weak data could push GBP/USD lower after it hit a yearly high of 1.3788 on July 1. GBP/USD has dipped below the 1.3500 level, and bearish momentum indicators suggest it might decline further. However, if it recovers above 1.3500, resistance could be found around 1.3583. The British Pound has shown mixed performance against major currencies, performing best against the Japanese Yen. In this context, there is a clear mismatch in the narratives of the central banks that traders can take advantage of. The Fed is under pressure from the former President’s trade policies and rising inflation forecasts, creating a complex situation. While some officials are looking at future cuts, we are concentrating on current events. Current data shows US CPI around 3.1%, limiting the Fed’s immediate options. According to the CME FedWatch Tool, markets still foresee over a 60% chance of a rate cut by the second quarter of next year, highlighting the conflict between current data and future expectations.

Comparison of Central Bank Policies

This situation is quite different from that in the United Kingdom. The noted economic slowdown is a significant factor, but it clashes with UK inflation, which remains high at 4.6%. This is over double the Bank of England’s target rate. They face a stagflationary predicament: cutting rates to encourage growth could lead to a spike in inflation. This tension before the upcoming CPI figures is a potential trigger for volatility. Historically, sharp divergences in central bank policies, like during the 2013 “taper tantrum,” have caused significant shifts in currency pairs. Our strategy for the coming weeks involves trading the expected volatility rather than just predicting direction. With the pair currently below the important 1.3500 level, buying straddles or strangles around key support levels before the UK inflation data is appealing. A worse-than-expected CPI could spark speculation of rate cuts, pushing the pair down toward 1.33, while a surprisingly high CPI would dampen those hopes and might push it back to around 1.3583. Both scenarios favor a long-volatility position. For those with a directional preference, the bearish momentum indicators and the UK’s poor growth outlook suggest that puts are the better option. We’re considering purchasing put spreads to reduce entry costs and define our risk, targeting strikes below 1.3400. Additionally, we are closely monitoring the pound’s strength against the yen, which serves as a classic risk indicator. A flight to safety would negatively impact GBP/JPY, but if the Bank of England must remain hawkish while the Bank of Japan continues its loose policy, long GBP/JPY futures might serve as a useful hedge against a purely bearish GBP/USD outlook. Create your live VT Markets account and start trading now.

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