GBP/USD slid to a five-week low of 1.3464 before paring losses, and was still down 0.23% at 1.3492 as thin UK and US calendars left markets focused on this week’s policy decisions. Oil jumped after Houthi attacks on Saudi Arabia damaged the East-West pipeline; authorities shut the line as a precaution, despite its capacity of about 7 million barrels per day. Meanwhile, last week’s US inflation data and supply risks helped drive the US 10-year T-note yield above 5% for the first time since 2023, while the US Dollar Index (DXY) rose 0.39% to 99.47.
Rates expectations also leaned towards the Federal Reserve, with pricing implying a move on Wednesday to 3.75%-4% from 3.50%-3.75%; Prime Terminal put the probability of a hike at 93%, versus 7% for no change. The Bank of England is expected to hold the Bank Rate at 3.75% after July GDP rose 0.3%. From last week’s peak near 1.3568, the pair was lower by over 0.56% as attention turns to UK jobs data on Tuesday, US ADP Employment Change (4-week average), and the FOMC. Technically, GBP/USD sat above the simple moving average triple at 1.3481 and a rising trendline near 1.3472, with RSI (14) around 45; resistance was flagged at 1.3688, while supports were cited at 1.3461 and 1.3353.
Yield Gap and Downward Pressure on GBP/USD
We believe derivative traders should position for continued downward pressure on the GBP/USD pair in the coming weeks. With the Federal Reserve highly likely to raise interest rates to the 3.75%-4.00% range while the Bank of England holds steady at 3.75%, the widening yield gap heavily favors the US Dollar. Historically, when monetary policy diverges like this, the currency with the higher yield enjoys sustained capital inflows.
To capitalize on this trend, we suggest looking at short-dated GBP put options with strike prices targeting the 1.3400 level. The pair is currently hovering around 1.3492, but a break below the key technical support at 1.3472 could quickly accelerate losses toward 1.3353. Buying puts allows us to limit our downside risk while maximizing potential gains if the British Pound continues to buckle.
Trading Strategies Amid Surging Dollar and Volatility
We should also monitor the spiking 10-year US Treasury yields, which recently climbed past the 5% threshold due to rising energy costs and inflation fears. This surge in yields has pushed the US Dollar Index (DXY) up by 0.39% to 99.47, reinforcing the dollar’s dominant momentum. For futures traders, maintaining short GBP/USD positions with tight stop-losses just above the 1.3570 resistance level offers a strong risk-reward ratio.
Additionally, implied volatility is expected to jump this week as both central banks deliver their policy decisions. We can exploit this by setting up bearish vertical spreads, which help lower the cost of premium in a high-volatility environment. This strategy protects our capital while allowing us to profit from the steady decline we expect to see as the macroeconomic gap widens.
