The Pound Sterling is holding steady against major currencies while the UK awaits preliminary Purchasing Managers’ Index (PMI) data. The Composite PMI is expected to dip slightly from 52.0 in June to 51.9, mainly due to slower hiring linked to rising employment costs. There’s growing anticipation for a 25 basis points interest rate cut by the Bank of England next month, which would bring the rate down to 4%. In the meantime, the Pound is trading relatively unchanged against the US Dollar, with GBP/USD experiencing a slight decrease as the US Dollar gains strength.

US Dollar Index Support

The US Dollar Index (DXY) is finding support below 98.00 after falling from a four-week high around 99.00. As the deadline for US tariffs approaches, there may be some volatility in the Dollar, but no new trade deals are expected. The US has completed trade agreements with the UK, Vietnam, and Indonesia. The European Union has indicated it will retaliate if the US imposes further tariffs, with proposed changes to tariff rates from 10% to between 15-20%. Traders are being cautious about expecting interest rate cuts from the US Federal Reserve in September. This reduced anticipation follows June’s Consumer Price Index, which showed price increases due to tariffs in certain sectors. Quantitative easing (QE) and tightening (QT) have a significant impact on the US Dollar. QE tends to weaken the Dollar, while QT strengthens it. The effectiveness of these measures relies on economic conditions and inflation targets set by the Federal Reserve. Although the Pound Sterling is maintaining its position, the crucial factor is the underlying economic data. The latest flash UK Composite PMI for July unexpectedly increased to 52.9, suggesting that business activity is growing more quickly than expected. This strength could provide short-term support for the currency, making call options on the GBP/USD pair attractive to traders.

Federal Reserve Actions

Despite the positive data, markets are firmly expecting a 25 basis point cut from the Bank of England in their August meeting. Historically, confirmed rate cut cycles tend to weaken a currency over time. Therefore, we believe selling GBP/USD futures on rallies toward the 1.2800 resistance level is a smart strategy for the upcoming weeks. We are monitoring the US Dollar Index, which has found strong support above 105—a significant improvement from earlier this year. The potential for new broad-based tariffs could create major volatility, making strategies like long straddles on the USD/JPY pair appealing. This approach allows traders to profit from significant price movements in either direction. Traders should not ignore Brussels’ firm position on retaliating against new US tariffs. The trade disputes from 2018-2019 caused the EUR/USD pair to drop over 10% during periods of high uncertainty. Therefore, we advise caution with long euro positions, possibly using put options on the currency pair to protect against downside risks. In contrast to previous cautions, we now see a higher than 65% chance of a Federal Reserve interest rate cut in September, according to the CME FedWatch tool. This shift follows the June Consumer Price Index report that indicated headline inflation cooling to 3.0% year-over-year. This suggests traders might bet on a weaker Dollar by purchasing futures in commodity-linked currencies that typically benefit from a more dovish US central bank. The central bank’s actions regarding its balance sheet also suggest a softer Dollar outlook. In June, the pace of quantitative tightening was officially slowed, decreasing the amount of bonds being removed from its balance sheet each month. This less aggressive policy further supports expectations for a weaker Dollar in the medium term, in line with the growing anticipation of rate cuts. Create your live VT Markets account and start trading now.

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