GBP/USD edged lower to about 1.3480 in Asian trading on Tuesday, staying below 1.3500 as the US Dollar rebounded after two sessions of falls. Markets are watching the US ADP Employment Change four-week average and speeches from Federal Reserve officials.
The US administration is considering new national security tariffs on several industries after the Supreme Court struck down parts of its second-term tariff programme. The plan would use Section 232 of the Trade Expansion Act of 1962 and sit alongside a 15% global tariff announced on Saturday.
Central Bank And Inflation Backdrop
On Monday, GBP/USD was largely rangebound after the Bank of England’s February hold delivered a 5-4 split. UK CPI eased to 3.0%, while the Fed maintained rates at 3.50% to 3.75% and January US CPI was 2.4%.
The pair closed up 0.04% near 1.3495 and traded under the 50-day EMA at 1.3523, with the 200-day EMA at 1.3371. The January high was 1.3869 and the December low was near 1.3287, while support is 1.3475 then 1.3371 and resistance is 1.3527 then 1.3600.
GBP/USD also rose 0.31% on Monday to 1.3507 after bouncing from 1.3475, following the Court’s rejection of IEEPA-based tariffs.
Given the divergence between a dovish Bank of England and a patient Federal Reserve, we see the path of least resistance for GBP/USD as being to the downside. The market is clearly pricing in a BoE rate cut, likely in March or April of last year, 2025, which should continue to weigh on the Pound. Therefore, we should consider buying put options or establishing bear put spreads to position for a potential break of the 1.3475 support level.
Volatility And Event Risk Outlook
The major source of uncertainty is the new US trade policy, which creates two-way risk and suggests higher volatility ahead. The proposed 15% global tariff could disrupt markets and potentially weaken the US Dollar if foreign investment slows, an event similar to the sentiment we saw in early 2024 when concerns over US political stability briefly hit the dollar. This uncertainty makes outright short positions risky, as a sudden political development could cause a sharp reversal.
This environment is ideal for volatility-based strategies. With key Fed speeches and the ongoing trade debate, we expect implied volatility on GBP/USD options to rise from its current low levels. We should look at purchasing straddles or strangles ahead of these events to profit from a large price move in either direction, regardless of the catalyst.
From a technical standpoint, the pair is trading below the 50-day moving average, confirming the recent bearish momentum. We see the 200-day EMA at 1.3371 as the next major target if downside pressure continues. A decisive break below this level would signal a more significant structural shift, and we should be prepared to add to bearish positions.
However, we must also note that the Stochastic Oscillator is in oversold territory, suggesting the current selling pressure could be nearing exhaustion. One-month risk reversals for GBP/USD, which show the premium for downside protection, have also flattened recently, indicating some traders are hesitant to bet on further sharp declines. A surprise rebound in the pound could be triggered if Fed speakers sound unexpectedly dovish or if the US tariff plan is delayed, making a reclaim of the 1.3527 level a key signal to watch.
