The GBP/USD pair struggles to recover as it remains in negative territory, trading just above 1.3400. The bearish outlook is maintained as the USD outperforms due to eased concerns over a potential US economic downturn.
The EU-US framework trade deal involves a 15% tariff on goods, with the EU investing $600 billion in the US. This week saw the USD experiencing its largest drop in a month, although GBP/USD gains were limited by a barrier at the 1.3600 mark.
Sterling Under Pressure
The pair is moving downwards for the second consecutive day, declining by 1% over this period. Weak business activity, job cuts in Britain, and government finance concerns are pressuring Sterling, alongside the failed break of the 1.3576 resistance level.
The recent trade deal impacts EUR/USD as it drops toward 1.1650, with the Euro struggling for demand amid strong USD performance. Additionally, Gold trades below $3,350, affected by positive risk sentiment and rising US bond yields.
Key upcoming events include America’s August 1 trade deadlines, Fed’s interest rate decisions, and Nonfarm Payroll reports, promising a volatile market week. Meanwhile, discussions on the Federal Reserve’s timing of rate cuts continue amid ongoing global economic uncertainties.
Market Volatility Ahead
We believe the downward pressure on the currency pair will persist, making long-dated put options an attractive strategy. The recent S&P Global/CIPS UK Composite PMI falling to a seven-month low confirms the weak business activity mentioned. This fundamental weakness suggests the failed break of key resistance was a significant bearish signal.
Job cuts are a real concern, with UK vacancies falling for 23 consecutive months as of May 2024, amplifying the negative outlook. Furthermore, with public sector net debt hovering around 99.8% of GDP, the highest level since the 1960s, government finance worries will continue to weigh on the pound. We see little reason for a reversal in the short term.
The upcoming Nonfarm Payrolls report and Fed interest rate decisions are pivotal events that will inject significant volatility into the market. Historically, these releases can cause intraday swings of over 100 pips, presenting opportunities for those positioned for price movement. We are therefore considering straddles or strangles to capitalize on the expected price swings, regardless of direction.
The euro’s struggle for demand is a market-wide theme, reinforcing our conviction in the dollar’s current outperformance. Similarly, the pressure on gold is directly linked to rising US bond yields, with the 10-year Treasury yield remaining stubbornly above 4.2%. This environment makes holding non-yielding assets expensive, further supporting capital flows into the dollar.
