GBP/USD continues to trade near the 1.3410 mark for the third straight session, facing challenges due to the strengthening US Dollar. The demand for the US Dollar is driven by heightened geopolitical tensions between Israel and Iran, alongside anticipation of the Bank of England’s policy decision.

UK’s CPI inflation recorded a drop to 3.4% in May from April’s 3.5%, remaining above the Bank of England’s 2% target. Markets anticipate approximately 48 basis points of rate cuts by the BoE by year-end.

The Federal Reserve held its interest rates steady, aligning with expectations, and traders foresee about 50 basis points of rate cuts by the end of 2025. Chair Jerome Powell cautions that any future rate cuts depend on improvements in labour and inflation data.

Narrow Range Trading

On Wednesday, GBP/USD traded within a narrow range around 1.3450, seeing moderate gains after the Federal Reserve’s interest rate decision. The Fed’s stance reinforced its commitment to monitor its dual mandate while continuing plans to reduce Treasury holdings.

With GBP/USD lingering around the 1.3410–1.3450 window for several sessions, we are seeing a market reluctant to push in either direction without stronger incentives. This consolidation reflects a balance between broader dollar strength and moderately soft UK inflation figures. A decline in UK CPI to 3.4%—while still above the official 2% objective—keeps monetary policy somewhat constrained but not urgent, giving monetary authorities some room to manoeuvre without triggering rapid market repricing.

In turn, markets are settling around nearly two rate cuts by year-end in the UK, with 48 basis points currently implied. This expectation aligns with a slightly more cautious central bank, likely wanting to see several more months of disinflationary data before acting. The longer CPI hovers above target, the more that pricing may shift—though the pressure seems softening incrementally.

Geopolitical Impact

Over in the US, while Powell held steady on rates during the latest announcement, the broader tone has not shifted materially. There remains a firm focus on data for any future adjustment, and we continue to gauge core inflation and employment readings as primary indicators to reassess exposure. The Fed’s fidelity to its dual mandate—managing inflation while fostering stable employment—is unchanged, but plans to lower Treasury exposure run in parallel. That dynamic alone hasn’t lifted the dollar dramatically yet, but it offers a tailwind.

From here, our approach should factor in the relative pace of disinflation. Short-dated sterling futures are slightly overestimating how quickly easing might occur, particularly if wage growth remains persistent or services inflation proves sticky. It’s too early to lean heavily into rate-sensitive instruments without further evidence from upcoming CPI releases.

Lower volatility in GBP/USD—seen in its narrow trading range—provides little opportunity in directional bets at the moment. We’re instead focusing on relative rate expectations and watching implied volatility closely in forward contracts. With USD retaining a modest bid amid geopolitical tension and reduced Fed urgency, downside for the pound could propagate if MPC members become more cautious.

Additionally, geopolitical headlines are still injecting short bursts of volatility into the dollar, particularly in correlation with safe haven flows. Should such tensions ease, or if new data out of the UK surprises, this balance could shift quickly. Recent moves reinforce paying close attention to cross-asset signals—especially bond markets—for clues on whether this stabilisation phase leads into a breakout or reversal.

For now, we are assessing risks in the skew of options pricing, especially around sterling puts, and watching whether realized volatility converges more meaningfully with the implied levels being priced in. Session-to-session drift remains minimal, but the build-up in open interest around mid-year expiry options suggests that many are positioning for a pronounced move before the end of summer.

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