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.
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’s move at 1.3%, the strongest weekly performance in three months. US markets were set to be closed on Friday for Independence Day.
US Labour Data and Policy Divergence
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%.
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.
Trading Strategy and Outlook
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.
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.
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.
