GBP/USD slipped to around 1.3195 in early European trade on Wednesday, keeping Sterling below 1.3200 as UK political uncertainty followed Keir Starmer’s resignation as Prime Minister on Monday. The pressure came after Andy Burnham’s win in the Makerfield by-election last week, prompting Labour to begin selecting a new leader. Markets are also positioned for the US May Personal Consumption Expenditures (PCE) Price Index, due on Thursday.
The pair was near 1.3200 in Asian hours as the US Dollar found support from firm domestic data and mixed geopolitical developments. Traders assessed conflicting messages on a potential US-Iran peace deal after President Donald Trump said Iran had agreed to open facilities to nuclear inspections, while Foreign Minister Abbas Araghchi said substantive nuclear negotiations had yet to start. In the UK, June flash PMI data undershot expectations, with Services at 48.7 versus a 50.0 consensus, and Sterling briefly dipped under 1.3200. Technical signals remained bearish, with price below the 50-day EMA near 1.3400 and also under the 200-day EMA.
Political Uncertainty and Volatility in the Pound
Given the political instability in the UK, we see the pound remaining under pressure. The resignation of the Prime Minister introduces significant uncertainty, which historically weakens a currency. We believe any rally toward the 1.3200 level will be short-lived and represents a selling opportunity.
We should anticipate a sharp increase in implied volatility for the pound in the coming weeks. Past political events, like the leadership turmoil in September 2022, saw 1-month GBP/USD implied volatility spike over 20%, well above the typical 6-8% range. This environment makes option strategies particularly attractive for capturing potential sharp moves.
Trading Strategy and Key Technical Levels
To position for further declines, we are looking at buying GBP/USD put options. This strategy allows us to profit from a fall in the pound below our chosen strike price while limiting our maximum loss to the premium paid. We will be targeting strikes below the 1.3100 level with expirations in July and August.
The US Personal Consumption Expenditures (PCE) data this Thursday is the next major catalyst. A strong inflation reading would likely boost the US dollar, adding more downward pressure on the GBP/USD pair. A cost-effective way to trade this is through a bear put spread, which lowers the initial cost of a purely bearish bet.
Technically, the structure remains firmly bearish with price well below the key moving averages near 1.3400. The recent weak UK PMI data, with the services sector in contraction at 48.7, reinforces this negative economic outlook. We will use these technical levels as guides for establishing or adding to short positions.
