Sterling is consolidating close to the top of its one-month and multi-month trading ranges, with GBP/USD supported by an improved market perception of UK political risk and slightly more constructive yield spreads after a modest mid-to-late July pullback. Price action has tracked fading downside risk reversals, as the premium for protection against downside moves continues to recede.
The near-term data diary is thin before Thursday’s second estimate of Q3 GDP, alongside June trade and industrial production releases. Technically, the pair has moved back towards its mid-July peak in the mid-1.35s and remains within the broader range in place since mid-February. Resistance is seen around 1.3600 and near the May highs in the mid-1.36s, while support is located in the mid-to-lower 1.34s; the near-term range is framed between 1.3450 and 1.3550.
Derivative Trading Strategies for GBP/USD
We recommend that derivative traders position for continued strength in the British pound as it consolidates near its multi-month highs. With downside risk reversals fading rapidly, the market is showing a clear preference for sterling upside. We suggest utilizing option strategies, such as selling out-of-the-money puts, to benefit from this diminishing demand for downside protection.
Yield Spreads and Trade Ideas
Our view is bolstered by constructive yield spreads, with the UK 10-year gilt yield holding steady near 4.1% compared to easing US Treasury yields. Recent economic data supports this trend, as the UK economy maintained a steady 0.5% quarterly growth rate, keeping the Bank of England’s policy rate firm at 5.0%. These solid domestic fundamentals reduce the likelihood of any sudden drop in the currency.
For the coming weeks, we suggest focusing on a tight trading range between 1.3450 and 1.3550. Traders can write short-term put options in the mid-1.34s, where solid technical support is established. If the sterling breaks higher, we should look to buy call spreads to target strong resistance levels near the 1.3600 mark.
