Sterling rose against the US dollar for a second day on Friday after the greenback’s run lost momentum as oil slipped back to levels seen before the US–Israel attack on Iran on 28 February. GBP/USD moved above 1.3200 and turned positive on the week, though the wider bearish trend remained. With crude lower, demand for the safe-haven dollar eased and risk appetite improved, offering support to the pound.
The respite for the dollar may prove brief as firm US data and AI-linked capital inflows revived the “US exceptionalism” narrative, while inflation stayed elevated: the PCE Price Index rose 4.1% year on year in May, the fastest pace in three years, keeping expectations of tighter Fed policy in play. In the UK, political uncertainty capped sterling, after Keir Starmer resigned on Monday and attention shifted to Andrew Burnham as the leading successor. In the longer term, sterling’s direction is shaped by BoE policy aimed at roughly 2% inflation, as well as UK data such as GDP and PMIs and the trade balance; the pound dates to 886 AD and in 2022 accounted for 12% of FX turnover, averaging $630 billion a day, with GBP/USD at 11%, GBP/JPY 3% and EUR/GBP 2%.
Short-Term Sterling Strength Seen as Correction
We see the current strength in the British Pound above the 1.3200 level as a short-term correction, not a reversal of the bearish trend. This bounce is tied to falling oil prices, which has temporarily weakened the US Dollar. We view this as an opportunity to position for a resumption of the Pound’s downtrend in the coming weeks.
The “US exceptionalism” narrative remains a powerful force that should keep the dollar strong. Recent data shows the U.S. economy continues to outperform its peers, with over $100 billion in venture capital pouring into the AI sector alone in the last year, attracting significant global investment. This fundamental strength suggests any dips in the US Dollar will likely be short-lived.
Furthermore, with the latest US Personal Consumption Expenditures (PCE) inflation running at 4.1%, the Federal Reserve is expected to remain hawkish. Markets are now pricing in over an 80% chance of a rate hike at the next meeting, according to the CME FedWatch tool, providing a solid support for the greenback. This contrasts sharply with other central banks that are considering rate cuts.
Political Risks and Trading Strategies
On the other side of the pair, political uncertainty in the UK is a major headwind for the Pound. The leadership questions are creating caution among investors, reminiscent of the volatility seen during the 2022 mini-budget crisis which sent the Pound to record lows. Until there is clarity on the new prime minister’s economic policies, we expect any significant GBP rallies to be sold into.
Given this outlook, we are looking at strategies that benefit from a fall in the GBP/USD exchange rate. We believe buying put options on the pair offers a clear, risk-defined way to position for a move lower. This allows us to capitalize on the expected reassertion of US Dollar strength and ongoing UK-specific weakness.
