The Pound Sterling (GBP) falls to near 1.3400 against the US Dollar (USD) during the European session on Monday. This decline occurs as the US Dollar strengthens following the announcement of a trade framework between the US and the EU.
The US Dollar Index rises to close to 97.90. A trade agreement with the EU lowers baseline tariffs on imports from Brussels to 15%, which is half of what was previously threatened.
Trade Agreement Impact
The trade agreement has spurred demand for riskier assets, yet risk-sensitive currencies find difficulty taking advantage as the US Dollar outlook improves. The agreement reduces uncertainty over the August 1 tariff deadline, with the US having secured deals with multiple trading partners, excluding Canada and Mexico.
Upcoming US-China trade talks in Stockholm are expected to extend their tariff truce for 90 days beyond August 12. According to the South China Morning Post, Washington and Beijing are likely to find common ground.
The Pound Sterling rises against peers apart from the US Dollar, amid a light UK economic calendar. Expectations for a 25 basis points interest rate cut by the Bank of England have been priced in due to a slowdown in the UK labour market.
Federal Reserve policy announcements on Wednesday are anticipated to impact the GBP/USD pair. The Fed is expected to keep interest rates unchanged, and remarks from Chair Jerome Powell will be closely monitored for future monetary policy insights.
Fed Policy Impact
The Pound remains under pressure against the US Dollar, trading below its 20 and 50-day Exponential Moving Averages (EMAs). A Head and Shoulders chart pattern indicates a bearish outlook, with the neckline near 1.3413 and a key support zone at 1.3140.
Based on the strengthening US currency, we believe derivative traders should anticipate further downside for the pound. The US Dollar Index has recently climbed above 106, its highest level in months, as the new trade framework with the EU removes significant economic uncertainty. This renewed confidence in the American economy makes its currency the primary beneficiary.
The positive outlook on trade is also reflected in expectations for the upcoming talks with China, which should further reduce global risk. Historically, when US-led trade uncertainty resolves, capital tends to flow into dollar-denominated assets first before moving to riskier currencies. This dynamic explains why the greenback is outperforming even in a “risk-on” environment.
On the other side of the pair, we see fundamental weakness in the Sterling. Recent data from the Office for National Statistics showed UK wage growth slowing for the third consecutive month, reinforcing the market’s pricing for a Bank of England interest rate cut. This policy divergence with a steady American central bank is a powerful headwind for the pound.
We will be watching the monetary policy announcement on Wednesday for cues. The CME FedWatch Tool shows markets are pricing in a greater than 90% probability that interest rates will be held steady, so all attention will be on the remarks from the chair. His commentary will be scrutinized for any shift in the central bank’s future policy stance.
Given the bearish Head and Shoulders chart pattern, we see a clear opportunity to position for a continued fall. Buying put options on the GBP/USD pair with strike prices below the 1.3400 neckline provides a strategy with defined risk. This allows traders to profit from a move down toward the key support zone.
A clean break below the 1.3140 support level would confirm the negative momentum and likely trigger further selling. Looking at historical price action, the next significant area of support rests near the psychologically important 1.3000 handle. We would view a break of the current support as a signal to increase short exposure.
