Drivers Behind Sterling’s Move and Dollar Weakness
We are seeing the pound test the crucial 200-day moving average near 1.3415, driven more by dollar weakness than any real strength in the UK economy. This presents an opportunity to position for further upside, but with caution. We believe using options to define risk is the most prudent approach over the next few weeks. Recent US jobs data, which showed non-farm payrolls adding only 150,000 jobs in May against an expected 180,000, reinforces the message from the producer price data. The Federal Reserve now has little reason to consider rate hikes, which historically weakens the dollar, much like we saw during the Fed’s policy pivot in late 2023. This supports our view that the path of least resistance for the dollar is lower. On the UK side, the 0.1% GDP contraction is concerning, but this is being offset by inflation that remains sticky. The latest CPI figures from late May came in at 3.1%, slightly above expectations, making it difficult for the Bank of England to consider cutting rates. This policy divergence with the US should continue to provide a floor for the GBP/USD pair.Geopolitical Developments and Trading Strategy
The geopolitical developments surrounding a potential US-Iran agreement are significantly dampening demand for the safe-haven dollar. We’ve seen this risk-on sentiment reflected in the VIX index, which has fallen below 14 in the past week, its lowest level in months. Should a deal be formally announced, we would expect another leg down for the dollar. Therefore, we are looking at buying July call options on GBP/USD with a strike price just above the current resistance, around 1.3450. This strategy allows us to capitalize on a potential breakout, while the premium paid represents our maximum risk if the weak UK fundamentals reassert themselves. The current low implied volatility in the options market makes this an attractive way to express a bullish view.Start trading now — click here to create your real VT Markets account.
