Sterling was little changed against major peers after the Office for National Statistics said UK GDP rose 0.1% in May, matching expectations and reversing a 0.1% fall in April. Industrial Production, however, undershot forecasts, dropping 0.5% month on month versus estimates for a 0.1% decline; April was revised to a 0.2% rise from 0%. Attention is turning to next week\u2019s UK employment and inflation releases.<\/p>\n
Versus the US dollar, the pound held on to Wednesday\u2019s gains following softer US Producer Price Index data for June. Headline PPI eased to 5.5% from 6% in May, while consensus had pointed to 6.2%. Separately, reports said incoming Prime Minister Andy Burnham is set to appoint Shabana Mahmood as Finance Minister, according to the Financial Times.<\/p>\n
We see the British Pound holding steady today, even though the latest economic data is highly mixed. While May\u2019s GDP grew by a flat 0.1%, a worrying 0.5% drop in industrial production shows the manufacturing sector is still struggling. However, the currency is getting a strong boost from political stability, as the new leadership\u2019s plan to appoint a known fiscal conservative to manage the treasury is reassuring local markets.<\/p>\n
We recommend derivative traders look closely at GBP\/USD long positions in the coming weeks due to weakening momentum in the US. Recent US producer price inflation dropped unexpectedly to 5.5% from 6.0% in May, which is driving down the US Dollar as markets price in interest rate cuts. This widening gap between a steady UK fiscal outlook and a softening US economy creates a favorable backdrop for buying Pound call options.<\/p>\n
To manage risk, we must prepare for high volatility next week when the UK releases its latest inflation and jobs data. Historically, UK wage growth has remained sticky, which could force the Bank of England to keep interest rates higher for longer than its peers. Traders should consider using option straddles to profit from sharp price movements, protecting themselves against any unexpected inflation surprises.<\/p>\n\n\n\n