Sterling was steady against the US dollar on Friday, holding near 1.3350 to 1.3370, and remained on course to finish the week higher. The GBP\/USD pair was described as consolidating around 1.3350, while downside attempts were limited near 1.3370 amid broad-based dollar weakness.<\/p>\n\n
Market pricing reflected growing doubt that the Federal Reserve will raise interest rates at its September meeting, a shift linked to a weaker-than-expected US Nonfarm Payrolls report. Against that backdrop, GBP\/USD was positioned for weekly gains of over 1%, while another measure put the week\u2019s move at 1.3%, the strongest weekly performance in three months. US markets were set to be closed on Friday for Independence Day.<\/p>\n\n
Given the broad weakness in the US Dollar, we see the recent Nonfarm Payrolls report as a pivotal event for the coming weeks. The reported addition of only 95,000 jobs for June, well below the 180,000 consensus, significantly undermines the case for a September rate hike by the Federal Reserve. This reinforces a trend we’ve been watching, as it follows a recent US CPI report showing inflation moderating to 2.8%.<\/p>\n\n
This creates a clear policy divergence that favors the Pound, as the Bank of England continues to grapple with firm UK wage growth, last reported at an annual rate of 4.5%. We believe this difference in central bank outlooks will be the primary driver of the GBP\/USD exchange rate. The market is quickly pricing out Fed tightening while the pressure remains on the BoE to stay hawkish.<\/p>\n\n
For derivative traders, this sharp increase in uncertainty around the Fed’s path suggests a rise in implied volatility is likely. We see value in strategies that benefit from increased price swings, such as buying GBP\/USD call options to gain upside exposure with limited risk. Historically, when the Fed’s future actions become this unclear, sharp market corrections or rallies often follow unexpected data prints.<\/p>\n\n
Therefore, we are adjusting our positioning to favor further GBP strength against the Dollar. Using futures contracts, we will be looking for a sustained break above the 1.3400 level as a confirmation of the next leg up. Traders should remain nimble, as market liquidity will be thin initially following the July 4th holiday.<\/p>\n\n
All eyes will now turn to the next round of US inflation data for confirmation of this cooling trend. A lower-than-expected CPI reading would likely solidify the market’s view that the Fed’s tightening cycle is over. Until then, we expect the Dollar to remain on the defensive.<\/p>\n\n\n\n