GBP/USD slipped below 1.3550 to trade around 1.3545 in early European hours on Tuesday, although the set-up was described as bullish above the 100-day SMA. The move left the pair in negative territory, with the US dollar firmer against the pound.
Support for the greenback followed hawkish remarks from Federal Reserve Chair Kevin Warsh at the Jackson Hole symposium. In his first Jackson Hole speech on Friday, Warsh said that with inflation running above the Fed’s 2 percent target, the central bank’s main focus should be ensuring underlying inflation is moving back to its objective at sufficient speed; otherwise, he said, “we have work to do.”
Short-Term Weakness and Dollar Strength
We suggest that derivative traders look to exploit the short-term weakness in GBP/USD while keeping a close eye on the broader bullish trend. The pair’s recent slip below 1.3550 offers a strong setup for short-term put options, especially as the US dollar gains strength from the Federal Reserve’s hawkish tone. However, because the pair remains comfortably above its 100-day Simple Moving Average (SMA)—currently hovering near 1.3380—we must treat this dip as a temporary correction rather than a full market reversal.
Following Fed Chair Kevin Warsh’s firm stance at the Jackson Hole symposium last week, CME FedWatch data shows a 62% probability of another 25-basis-point US rate hike in the coming weeks. This hawkish outlook has pushed the 10-year US Treasury yield back toward 4.20%, giving the greenback solid near-term momentum. We believe derivative traders should utilize short-term USD call options to capture this immediate dollar strength.
Strategic Positioning for a Rebound
On the other side of the equation, the British Pound remains resilient due to sticky UK core inflation, which was recently reported at 3.4% for July. Historically, when both central banks remain hawkish, the GBP/USD pair tends to find strong buying interest at major moving averages during September trading. Therefore, we recommend positioning for an eventual rebound by buying longer-term call options with strike prices structured around the 1.3400 support level.
To manage risk effectively in the coming weeks, we advise traders to deploy bull call spreads to lower the cost of premium while still capturing the eventual upward move. Keeping stop-losses on spot positions tight just below the 100-day SMA will protect capital against any unexpected shifts in central bank rhetoric. This balanced strategy allows us to profit from the dollar’s current momentum without missing out on the sterling’s primary uptrend.
