Sterling came under pressure in early Asian trade on Monday, with GBP/USD slipping near 1.3210 as UK political uncertainty intensified. Reports said Prime Minister Sir Keir Starmer was expected to outline a resignation timetable, a development that would leave Britain on course for its seventh premier in a decade and open the way for Andy Burnham to replace him. The move followed fresh headlines from the US, while a UK minister pointed to political challenges, adding to short-term selling in ‘Cable’.
The dollar found support from hawkish Federal Reserve messaging after policymakers held the benchmark rate at 3.50% to 3.75% last week, following Kevin Warsh’s first meeting as chair; he said price stability would guide decisions. Futures markets have priced a 25 bps rate rise for September, with some chance of a move as soon as next month. Separately, the pound is described as the world’s oldest currency, dating to 886 AD, and the fourth most traded in FX, accounting for 12% of transactions or about $630 billion a day based on 2022 data; GBP/USD represents 11% of FX turnover, GBP/JPY 3%, and EUR/GBP 2%, with issuance by the Bank of England, which targets inflation of around 2% through interest-rate policy.
UK Political Instability Drives Sterling Downside
Given the political uncertainty in the UK, we see further downside for the GBP/USD pair in the coming weeks. The potential resignation of Prime Minister Starmer introduces significant instability, which typically weighs on a currency. This pressure is already evident as the pair struggles around the 1.3200 level.
We are positioning for larger price swings and advise traders to do the same. One-month implied volatility for GBP/USD options has already jumped from around 7% to 11% in the past week, reflecting market anxiety. This is reminiscent of the volatility spikes seen after the 2016 Brexit vote, suggesting that buying protection is now prudent.
Policy Divergence and Strategies for a Weaker Pound
On the other side of the pair, the US Dollar is showing persistent strength. The Federal Reserve’s hawkish stance under its new leadership is a primary driver for the greenback. Current market pricing, reflected in the CME Group’s data, shows a greater than 70% probability of a 25-basis-point rate hike by the September meeting.
This Fed outlook is supported by robust US economic data. The most recent jobs report showed a stronger-than-expected gain of 250,000 nonfarm payrolls, and last month’s CPI data showed core inflation remaining sticky at 3.1%. These figures give the Fed a clear mandate to prioritize price stability through tighter policy.
In contrast, the UK economy is showing signs of stagnation, which will likely limit the Bank of England’s options. Recent ONS figures revealed that UK GDP was flat in the first quarter of 2026, while inflation has cooled to 2.3%, much closer to the BoE’s target. This monetary policy divergence between a hawkish Fed and a constrained BoE creates a clear path for a weaker pound against the dollar.
Therefore, we are looking at strategies that benefit from a falling GBP/USD. Buying 1-month and 3-month put options offers a direct way to profit from downside moves while capping risk. This approach allows traders to position for the expected drop as UK political events unfold through the summer.
