Sterling slipped against the dollar on Monday, with GBP/USD near 1.3338 in European trade after printing an almost three-week low around 1.3316. The move tracked renewed strength in the greenback as markets increased bets on a Federal Reserve rate rise later this year. The US Dollar Index (DXY) held close to 100.10, extending Friday’s advance.
Rate expectations have repriced quickly: the CME FedWatch tool puts the chance of at least one Fed hike this year at 74.2%, up from 45.2% a week earlier, after May US Nonfarm Payrolls showed 172K jobs created versus forecasts of 85K. Attention now turns to May US Consumer Price Index (CPI) figures on Wednesday and April UK Gross Domestic Product (GDP) data on Friday. Technically, GBP/USD is trading around 1.3330 below the 20-day Exponential Moving Average (EMA) at 1.3434, while the Relative Strength Index (RSI) sits near 38; resistance is seen at 1.3434 and then near 1.3585, with support around 1.3239 and a further level at 1.3200.
Persistent US Dollar Strength and Weaker Sterling Outlook
We see the GBP/USD pair struggling around the 1.2550 level, weakened by a persistently strong US dollar. The US Dollar Index (DXY) is holding firm near 105.50, reflecting broad strength against major currencies. This dynamic continues to create a challenging environment for the pound.
The recent US jobs report for May, which added 215,000 jobs against an expected 180,000, has significantly bolstered expectations for a more aggressive Federal Reserve. Market pricing, reflected in the CME FedWatch tool, now suggests a 65% probability of an interest rate hike by the end of summer. This is a sharp increase from the 40% chance priced in just a month ago.
Meanwhile, the UK economy is showing signs of stalling, with the latest GDP figures indicating a slight contraction of 0.1% for April. This economic softness makes it difficult for the Bank of England to match the Fed’s hawkish stance. This growing divergence in monetary policy is the primary driver behind our bearish outlook for the pound.
Positioning for Downside and Market Strategy
Given this backdrop, we believe traders should consider positioning for further downside in GBP/USD. Buying put options with a strike price around 1.2400 could offer a defined-risk way to profit from a potential slide in the coming weeks. This strategy allows for participation in a downward move while capping the maximum loss at the premium paid.
We anticipate a spike in volatility around the upcoming US Consumer Price Index (CPI) report on Wednesday. For a more cost-effective approach, a bear put spread could be implemented. This involves buying a higher-strike put and selling a lower-strike one to finance the position and capitalize on a moderate decline.
This situation is reminiscent of late 2022 when aggressive Fed tightening, contrasted with UK economic uncertainty, drove the pound towards historic lows. That period showed how quickly this kind of policy divergence can punish a currency. A break below the key 1.2500 psychological level could open the way for a deeper slide towards 1.2350.
