GBP/USD stayed near 1.3620 after the latest US inflation report led traders to increase the probability of a Federal Reserve rate cut in June.
The pair was little changed on the day and was set to finish the week up 0.12%.
Fed Cut Odds Rise
The recent US inflation report has significantly altered our view, showing a monthly increase of just 0.1%, which was below market expectations. This has led us to believe the Federal Reserve has a clearer path to begin cutting interest rates, with market odds for a June reduction now climbing above 75%. This fundamental shift is putting downward pressure on the US dollar.
Given this outlook, we see opportunities in positioning for further GBP/USD strength in the coming weeks. One approach is to consider buying call options on the pair with expiration dates set for late June or July. This allows us to profit from a potential rise in the exchange rate driven by the anticipated Fed policy move.
We must also consider the policy divergence at play, which is a big change from what we saw for most of 2025 when central banks moved in lockstep. The Bank of England is facing its own inflation which, at 3.5% last month, remains well above its target, suggesting they may hold rates steady for longer. This contrast between a softening Fed and a steady BoE should provide underlying support for the pound.
However, we need to monitor upcoming data closely, especially the next US non-farm payrolls report. A surprisingly strong jobs number could quickly dampen expectations for a June cut and cause implied volatility to rise sharply. For this reason, using strategies like bull call spreads could be a prudent way to manage the costs and risks of these trades.
