Sterling edged up 0.10% on Monday, with improved risk appetite helping GBP/USD recover to 1.3349 from an intraday low of 1.3306. The US Dollar Index fell 0.16% to 99.91 as the Greenback gave back part of Friday’s gains, while oil pared earlier strength after Iran’s army said its attack on Israel had ended, though it warned that further strikes on Lebanon could prompt retaliation. Iran and Israel agreed to halt fire after US President Donald Trump called for an end to the shooting to allow talks between Washington and Tehran to resume.

In the US, a strong Nonfarm Payrolls release reinforced expectations of a resilient labour market and encouraged hawkish Fed rhetoric. Attention now turns to May CPI, expected to rise to 4.2% from 3.8% in April; markets price a 92% probability of a 25-basis-point Fed rate rise in 2026. UK data are absent, but speculation that the BoE could tighten by at least 50 bps in 2026 limited Sterling’s downside. Technically, GBP/USD sits near 1.3340, below clustered simple moving averages around 1.3456 and a descending trend line from 1.3869, with RSI (14) near 39; support is tracked from 1.3159.

Short-Term Stability and Macro Drivers

We see the current stability in GBP/USD as temporary, driven by a slight dollar pullback and a brief lull in geopolitical tensions. The main event for the coming weeks is the US Consumer Price Index (CPI) release this Wednesday, which will likely decide the dollar’s next major move. A high inflation print will almost certainly reinforce the Federal Reserve’s hawkish stance.

With markets expecting May’s CPI to surpass 4.2%, we are positioning for renewed dollar strength. The CME FedWatch Tool shows traders are already pricing a 92% probability of a Fed rate hike by year-end, and a hot inflation report would solidify this. Looking back at the 2022 tightening cycle, we saw that CPI prints beating expectations consistently led to sharp drops in GBP/USD.

BoE Outlook, Option Strategies, and Technicals

While the Bank of England is also expected to tighten policy, this is largely priced into the pound. UK core inflation has remained stubbornly above 4.5% for the last three months, which is why money markets are pricing in over 60 basis points of BoE hikes for the remainder of 2026. This support for sterling may limit the downside, but it is unlikely to overpower a Fed-driven dollar rally.

Given the upcoming data, we see implied volatility for one-month GBP/USD options rising to around 9.5%, signaling expectations of a significant price swing. This makes buying straddles a viable strategy to profit from a large move in either direction following the CPI report. For those with a directional view, we favor buying put options with a strike price below the 1.3300 level to bet on a decline.

From a technical perspective, the pair remains in a clear downtrend below the key resistance at 1.3456. Any failure to hold the support trendline near 1.3159 on the back of strong US data would confirm our bearish outlook. A sustained break of this level would likely trigger a swift move lower, making those put options potentially very profitable.