Sterling has relinquished part of its gains linked to a US-Iran breakthrough, leaving GBP\/USD on a softer footing as the US growth outlook outstrips the UK\u2019s. UK data have cooled momentum: real GDP fell -0.1% m\/m in April after +0.3% in March, the first monthly decline since August 2025, with services output down -0.2% m\/m. Production was flat and construction rose 0.1% m\/m. Markets have also repriced Bank of England tightening, trimming expected rate rises over the next 12 months to 40bps from 60bps a day earlier.<\/p>\n
Forward-looking surveys are weak. PMI readings imply UK real GDP could contract -0.2% q\/q in Q2, below the BoE baseline forecast of +0.1% q\/q, as lower energy prices and softer global tightening expectations filter through. Politics is another risk factor, with attention turning to the 18 June Makerfield by-election; polls put Andy Burnham 10 points ahead of Reform UK, raising the prospect of internal pressure on Prime Minister Keir Starmer and renewed scrutiny of the UK\u2019s fiscal stance.<\/p>\n
Given the recent pullback in GBP\/USD, we see further downside for the pound in the coming weeks. The rally based on US-Iran news appears to be exhausted, and underlying economic weakness in the UK is becoming the dominant factor. Our target for the currency pair is 1.3100.<\/p>\n
The divergence between the US and UK economies is widening. Recent US retail sales figures surprised to the upside at +0.5%, whereas the latest UK consumer confidence survey has fallen to a 12-month low of -25. This supports a view of a stronger dollar against a weakening pound.<\/p>\n
Slowing UK growth has forced the market to reduce its expectations for Bank of England rate hikes. Swaps markets have priced out a full 25 basis point hike, now anticipating just 40bps of tightening over the next year. While falling energy prices are a global factor, the latest dot plot from the US Federal Reserve still signals a greater resolve to maintain its policy path.<\/p>\n
The UK political scene adds a layer of risk that we believe is underappreciated. All eyes are on the Makerfield by-election scheduled for June 18. The potential for a victory by Andy Burnham could introduce significant political uncertainty and challenge the current Labour leadership.<\/p>\n
This political risk makes sterling options attractive. Implied volatility for one-month GBP\/USD options has already climbed from 7.5% to 8.2% in the last week, and we expect this trend to continue as the by-election nears. We believe buying GBP\/USD put options with a strike near 1.3150 expiring in early July is a prudent way to position for a decline.<\/p>\n
While the Bank of England’s focus on inflation should provide a floor and prevent a disorderly slide, it is unlikely to be enough to reverse the negative sentiment. The path of least resistance for GBP\/USD appears to be lower.<\/p>\n","protected":false},"excerpt":{"rendered":"
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