Sterling rose 0.20% against the dollar on Friday as the US currency eased after reaching year-to-date highs, with money markets leaning towards a less hawkish Federal Reserve even as officials stress an inflation focus. GBP/USD was at 1.3217 after a session low of 1.3180, and the pair was on course for a weekly decline of 0.15%. UK politics remained in focus following Prime Minister Keir Starmer’s resignation, with an orderly handover expected to a seventh premier in 10 years; Andy Burnham leads the race and is the only declared candidate. Burnham said on May 14 he would seek a parliamentary seat to challenge Starmer, a move that weakened the pound and lifted gilt yields, while his team later said he would follow Chancellor Rachel Reeves’ fiscal rules.
Rate expectations for the Bank of England shifted, with markets pricing 21 bps of tightening in 2026 versus 33 bps a week earlier, according to Prime Terminal. In the US, University of Michigan consumer sentiment improved in June as the index rose to 49.5 from a 48.9 preliminary reading and from 44.8 in May, while one-year inflation expectations held at 4.6% and five-year expectations eased to 3.3% from 3.4%. The dollar index fell 0.18% to 101.25, and Minneapolis Fed president Neel Kashkari said rates may need to rise due to broad inflation. Technically, GBP/USD at 1.3218 stayed below a 50/100/200-day moving average cluster around 1.3431; RSI (14) was near 38, with resistance at 1.3431, 1.3454 and 1.3535, and support at 1.3218 then 1.3159.
Negative Outlook for Sterling Amid Political and Policy Uncertainty
Given the political uncertainty in the UK and shifting Bank of England expectations, we see the path of least resistance for GBP/USD as being lower in the coming weeks. The technical picture supports this bearish view, with the pair trading below all key moving averages. We should therefore structure our strategies around potential further weakness in the pound.
The calm surrounding the new leadership contender, Andy Burnham, could be temporary and we remain cautious. We only have to look back to the market chaos of September 2022, when political missteps caused GBP/USD to crash to record lows near 1.03, to understand the potential risks. This history suggests any signs of fiscal loosening could trigger significant sterling selling.
The market has aggressively priced out Bank of England rate hikes, which removes a key pillar of support for the pound. In fact, current swap market data indicates traders see only a 40% chance of a single 25 basis point rate hike by the end of 2026. This dovish repricing makes sterling fundamentally less attractive.
Strategy Considerations and Key Risk Levels for GBP/USD
While the US Dollar has softened recently, the upcoming Nonfarm Payrolls report is a major event risk that could quickly reverse that trend. After last month’s strong print of over 270,000 jobs, economists are forecasting another solid gain of around 195,000, which would challenge the market’s less hawkish view on the Fed. A strong number would likely propel the dollar higher and accelerate the decline in GBP/USD.
For derivative traders, this environment makes buying GBP/USD put options an attractive strategy to position for a drop while defining risk. With one-month implied volatility for the pair ticking up to 9.2%, options are pricing in more movement, and we would look at strike prices targeting the key support level near 1.3159. This allows us to profit from a downward move over the next few weeks.
We must also manage the risk that our view is wrong, with the main resistance clustered around the 1.3431 area. A decisive break above this level would signal the bearish trend is exhausted, forcing us to reconsider short positions. In such a scenario, using call options could offer a way to play a potential reversal.
