Sterling was steady against the Dollar on Monday as prospects for a US–Iran peace deal waned after weekend exchanges of fire, leaving GBP/USD near 1.3445. With negotiations appearing to stall and Iranian media warning the ceasefire could fail if Israel’s attacks on Lebanon continue, demand for the haven Greenback supported the US Dollar Index, which rose 0.34% to 99.27.
US data also underpinned the move. The ISM Manufacturing PMI climbed to 54 in May from 52.7 in April, its highest level in four years, while the prices paid component eased to 82.1 from 84.6. Attention now turns to May Nonfarm Payrolls, other labour-market releases, the ISM Services PMI and Federal Reserve speeches. In the UK, the calendar is light, with focus on Bank of England Governor Andrew Bailey and the BoE Monetary Policy Report Hearings on Wednesday; money markets are pricing nearly 42 basis points of tightening by year-end. On charts, GBP/USD sits around 1.3454, with support near 1.3447 and 1.3351, resistance around 1.3602, and the 14-day RSI just under 49.
Safe-Haven Flows and Policy Expectations Drive GBP/USD
We are seeing the US Dollar strengthen due to its safe-haven appeal as tensions between the US and Iran escalate. This is putting immediate pressure on the Pound, which is currently struggling to stay above the 1.3445 level. Short-term derivative plays that favor dollar strength could be beneficial as long as this geopolitical risk remains at the forefront.
The robust US ISM manufacturing index, hitting a four-year high of 54, adds a strong economic reason for the dollar’s rise. Recent data from the Atlanta Fed’s GDPNow model also points to solid 2.8% growth for the second quarter, further supporting this trend. We see this as a reason to consider put options on GBP/USD, especially with the key Nonfarm Payrolls report due this Friday.
However, we believe the Pound’s downside is limited by market expectations for the Bank of England to raise interest rates. With recent UK inflation data holding firm at 2.5% and markets pricing in nearly two rate hikes by the end of the year, selling GBP puts around the 1.3350 support level could be a viable strategy to collect premium. Historically, the Pound has shown resilience when the BoE maintains a hawkish stance, even against a strong dollar.
Volatility Strategies and Key Technical Levels
This conflict between a safe-haven dollar and a hawkish BoE creates an environment ripe for volatility. The GBP/USD implied volatility index, now sitting at a moderate 8.5%, will likely increase heading into central bank hearings and US jobs data. This suggests that buying a straddle or strangle could be a prudent way to trade the potential for a sharp move in either direction.
From a technical perspective, the pair is trading in a tightening range, and we are using key levels to structure our positions. We view a sustained break above the 1.3602 trend-line as a signal to add to GBP call options for a larger recovery. Conversely, a decisive move below the 1.3351 support zone would confirm a deeper slide, making protective puts more valuable.
