Sterling was steady on Friday against the Dollar, yet remained on track for a weekly gain of more than 1% as markets grew more doubtful that the Federal Reserve will raise rates in September. GBP/USD hovered around 1.3350 and was also cited at 1.3354, while the 200-day Simple Moving Average sits at 1.3399 and a nearby SMA cluster converges near 1.3409. US labour data showed June Nonfarm Payrolls undershot forecasts, and earlier months were revised to imply -74K jobs across April and May, shifting pricing towards an October move. Initial Jobless Claims for the week ending 4 July are seen rising from 215K to 219K, with the FOMC minutes and the 14 July US inflation report in focus, alongside the ISM Services PMI.
In the UK, political uncertainty persisted as the currency traded near mid-June levels, while June’s S&P Global Services PMI fell from 49.3 to 48.8 and New Orders declined for a fourth month. Next week brings Bank of England speeches and the Financial Stability Report. Derivatives pricing pointed to a 46% probability of a Fed rate rise in 2026, while futures implied a 70% chance of a Bank of England hike by end-2026. Technical markers included a downward resistance line from around 1.3520, an RSI (14) near 53, and longer-term support from about 1.3159.
US Rate Hike Expectations and Volatility Strategies
We see the market correctly questioning a Federal Reserve rate hike in September following the weak jobs report. The Nonfarm Payrolls figure for June came in at just 150,000, below the 180,000 consensus, and downward revisions now show a net loss of 74,000 jobs in the prior two months. This data, combined with an unemployment rate that just ticked up to 4.0%, gives the Fed room to pause.
The main event for us is the upcoming US inflation report on July 14th, which will create significant volatility. With the last Core CPI reading for May holding firm at a stubborn 3.5% year-over-year, any surprise to the upside will bring a September Fed hike right back into play. We should prepare for a sharp move in the US Dollar by considering options strategies that benefit from a spike in volatility.
To position for this, we are looking at buying options straddles on GBP/USD futures expiring after the inflation data release. This involves buying both a call and a put option with the same strike price and expiration date. This strategy will be profitable if the currency pair makes a strong move in either direction, without us having to predict the outcome of the inflation report.
UK Economic Outlook, Central Banks Divergence, and Positioning
In the UK, the economic picture looks much weaker, bordering on stagflation. The recent S&P Global Services PMI fell to 48.8, marking a contraction, while the latest quarterly GDP showed anemic growth of only 0.1%. Despite this, UK inflation remains much higher than in the US, with the last reading at 4.2%, explaining why markets are pricing a 70% chance of a Bank of England rate hike.
This divergence in central bank outlooks, coupled with technical resistance for GBP/USD near the 1.3400 level, suggests the pound’s recent strength is fragile. If US inflation data comes in hot, the pair is likely to be rejected from this resistance, and we would view this as an opportunity to add to bearish positions. A break below the 1.3200 support level could see a rapid move lower.
Given the clearer divergence in rate expectations, we are also looking at interest rate derivatives to play this theme more directly. We believe there is value in trades that bet on UK short-term interest rates rising relative to US rates over the next six months. This can be expressed through instruments tied to SONIA and SOFR futures.
