The Pound Sterling dropped to about 1.3430 against the US Dollar on Tuesday because of rising demand for the safe-haven US Dollar. This drop came even though the Federal Reserve signaled a more cautious approach, which may lead to two interest rate cuts later this year. The US Dollar Index increased by 0.25% to 98.35, showing the Dollar’s strength against six major currencies. Predictions show there’s an 81.5% chance the Fed will lower borrowing rates in its future meetings because of a weaker labor market and high consumer inflation expectations.

Bank Of England’s Expected Stance

The Bank of England (BoE) is likely to take a cautious approach as worries about the UK’s labor market grow. The next interest rate decision is expected in November. The BoE predicted inflation would peak at 4% in September, affecting its gradual easing of monetary policy. The Pound Sterling stayed under pressure, hovering around 1.3440 and below the 20-day EMA of 1.3475. Technical indicators suggest the currency may remain stagnant, with support at 1.3140 and resistance at 1.3726, showing its weak position against the US Dollar. Given the significant drop in the Pound Sterling, it’s an opportunity to expect further declines in the weeks ahead. Traders might consider buying GBP/USD put options with a strike price below 1.3400, aiming for the critical support level near 1.3140. This strategy allows for potential profit from the expected decline while limiting the maximum loss to the premium paid. The weakness in Sterling is backed by the cooling UK labor market, which is likely to push the Bank of England towards a more cautious approach. We’ve seen UK job vacancies decrease from over 1.2 million in 2023 to under 950,000 recently, suggesting that businesses are less eager to hire. The upcoming speech from BoE’s Huw Pill on Wednesday could further confirm this cautious outlook and push the Pound lower.

Potential Risks And Strategies

However, the strength of the US Dollar may not last, so we must also consider the risk of a sudden reversal. Recent US inflation data has cooled to around 3.1%, supporting the market’s expectation of an 81.5% chance for two more Fed rate cuts this year. If political tensions in France and Japan ease, attention may shift back to the dovish Fed, weakening the Dollar. This mixed outlook from the central banks sets the stage for high volatility. If you are unsure about the direction, a long straddle strategy on GBP/USD might be effective. This involves buying both a call and a put option at the same strike price and expiration date, allowing profit from a significant price move in either direction, which seems likely after more information from central bank officials this week. We recall the significant volatility of Sterling during the political turmoil in autumn 2022, and similar conditions could arise again. Thus, using short-term options to leverage immediate bearish sentiment is sensible, while longer-term options could protect against a potential rebound later this year. It’s crucial to manage position sizes, as speeches from Fed and BoE officials can quickly impact the market. Create your live VT Markets account and start trading now.

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