GBP\/USD traded with mild gains near 1.3200 in early European dealing on Friday, holding a positive bias for a second session during Asian hours but staying below the prior day\u2019s swing high. The move followed a softer tone in US inflation data that trimmed expectations for Federal Reserve rate hikes, after the US Personal Consumption Expenditures Price Index still pointed to persistent inflationary pressure. An interim US\u2013Iran peace deal signed earlier this month helped push crude oil back to pre-war levels, and the US Dollar eased from its highest level since May 2025, while risks from a Hormuz ship attack continued to underpin demand for the safe-haven currency.<\/p>\n
Sterling\u2019s earlier June performance was overshadowed by UK political uncertainty despite a hawkish Bank of England decision. The BoE held Bank Rate at 3.75% on 18 June in a 7\u20132 vote, with services inflation near 3.7%, yet GBP\/USD slid about three big figures from around 1.3450 to a multi-month low near 1.3150, after touching November 2025 lows around 1.3140 on Wednesday, before stabilising close to 1.3200. Keir Starmer resigned on 22 June, and markets are now focused on Andy Burnham as the likely successor and on who would serve as finance minister, with Rachel Reeves expected to be replaced.<\/p>\n
We are watching the Pound struggle around the 1.3200 level, caught between UK political turmoil and shifting US rate hike expectations. The resignation of Keir Starmer has created a leadership vacuum that is now the single biggest driver for sterling. This political risk is completely overshadowing the Bank of England’s hawkish stance, even as the latest data from the ONS shows UK core inflation remains stubbornly high at 3.5%.<\/p>\n
This uncertainty is clearly reflected in the derivatives market, where one-month implied volatility for GBP\/USD has spiked to over 12%, a level not seen since the 2024 election jitters. Consequently, we expect option premiums to remain elevated, suggesting traders should be prepared for sharp, unpredictable swings. Any headlines regarding Andy Burnham’s potential cabinet picks, especially for Chancellor, will likely trigger significant price action.<\/p>\n
We saw a similar, though more extreme, pattern during the 2022 leadership contest, which ultimately led to a fiscal crisis and a historic collapse in sterling. While the current situation is less severe, it serves as a reminder that markets punish a perceived lack of clear fiscal direction. The key difference now is that the opposition Reform UK party is polling at a record 19% according to the latest YouGov poll, adding another layer of complexity to any future election calculus.<\/p>\n
On the other side of the pair, while the latest US PCE data showed core inflation still at 2.8%, the market is trimming bets on future Fed hikes. Fed funds futures now imply only a 30% chance of another rate increase this year, down from 65% a month ago. This dollar weakness is providing a fragile floor for GBP\/USD, but any new geopolitical flare-up, like the Hormuz incident, could easily reverse this trend.<\/p>\n
Given this backdrop, we believe selling sterling strength on rallies towards the 1.3300-1.3350 area presents a viable strategy, as political headwinds will likely cap significant upside. The latest CFTC data supports this caution, showing speculative net-long positions in sterling have been cut by nearly 40% in the last week alone. Using options to define risk, such as buying puts or establishing put spreads, seems prudent until a new Prime Minister and Chancellor are confirmed.<\/p>\n\n\n\n