Sterling trimmed earlier losses and rose 0.08% on Thursday after an Axios report said US and Iranian negotiators had agreed a 60-day memorandum of understanding to extend the ceasefire and open talks on Iran’s nuclear programme, subject to approvals that include President Donald Trump. GBP/USD was trading at 1.3437 after rebounding from an intraday low of 1.3367, while the US Dollar Index (DXY) slipped 0.17% to 99.05 as the dollar softened.
US data kept the macro backdrop in view. Core PCE inflation increased to 3.3% year on year in April from 3.2%, and first-quarter GDP was revised down to 1.6% year on year from 2%; meanwhile initial jobless claims rose to 215K in the week to 23 May versus forecasts of 211K. In UK politics, Labour leadership tensions were reported, while attention turns to a speech by Bank of England Governor Andrew Bailey and appearances by Fed officials including Schmid, Bowman, Paulson and Daly. On charts, GBP/USD sits near 1.3436 under the Triple SMA area around 1.3445, with RSI near 47; resistance is seen near 1.3611, with support around 1.3339 and 1.3159.
Geopolitical Developments and Short-Term USD Outlook
Based on the potential US-Iran deal, we are positioning for short-term US Dollar weakness. A confirmed ceasefire would be a significant risk-on event, reducing the dollar’s safe-haven appeal. We are considering buying call options on currency pairs like GBP/USD to capture any immediate upside if the deal is officially approved.
However, we must weigh this against the worrying US economic data. The combination of persistent Core PCE inflation, last reported at 3.3%, and slowing GDP growth of 1.6% points toward stagflationary pressures. This puts the Federal Reserve in a very difficult position, creating uncertainty that could cap any major dollar downturn.
Strategic Options Positioning Amid Economic and Political Risks
Recent data reinforces this view, with the latest US Manufacturing PMI for May dipping to 49.8, indicating a contraction. Historically, such stagflationary environments, reminiscent of the 1970s, have led to heightened market volatility. This suggests that any positions we take should be carefully hedged to protect against sudden reversals in sentiment.
On the other side of the pair, we are cautious about the pound’s strength due to the escalating political infighting within the UK’s ruling Labour party. This internal turmoil could easily limit any rally in the GBP/USD. We believe selling out-of-the-money call options near the 1.3600 resistance level offers a good risk-reward opportunity to capitalize on this potential cap.
Given the conflicting drivers, with the GBP/USD trading tightly below the 1.3445 moving average cluster, we expect the pair to be range-bound in the coming weeks. A neutral options strategy, such as a short straddle, could be effective to profit from time decay. This strategy would benefit if the pair remains caught between the positive geopolitical news and the negative domestic fundamentals of both economies.
