Sterling held early gains near 1.3500 against the US Dollar in late European trade on Monday, as markets stayed risk-on on expectations of a near-term US–Iran agreement. US equities pointed higher, with S&P 500 futures up almost 1% around 7,550, while the US Dollar Index (DXY) slipped 0.33% to near 99.00. The tone followed weekend remarks from US President Donald Trump that a deal was “largely negotiated”, although Iran’s foreign ministry said many issues had been concluded without indicating an agreement was close to signature.
In technical terms, GBP/USD remained around 1.3500 after moving back above its 20-day Exponential Moving Average (EMA) at 1.3474, while the Relative Strength Index (RSI) hovered near 52. Resistance is seen around 1.3612, with a break potentially opening a move towards 1.3700. On the downside, failure to hold the 20-day EMA could pull the pair to 1.3400, and a drop below that level would expose the May 18 low at 1.3302.
Risk-On Sentiment Supports the British Pound
We see the British Pound holding firm near 1.2850 against the US Dollar this week, reflecting a broader risk-on sentiment in the market. This optimism stems from recent reports suggesting a potential breakthrough in US-China technology trade talks. This positive mood is causing a slight pullback in the US Dollar as traders move into higher-yielding assets.
At present, S&P 500 futures are trading up 0.8% around 6,250, signaling a strong appetite for equities. Reflecting this, the US Dollar Index (DXY), which has been hovering near 103 for weeks, is trading lower by about 0.4% near 102.50. This indicates that capital is flowing away from the safety of the dollar for the time being.
While the US Commerce Secretary hinted that a deal is “imminent,” we note that official statements from Beijing are more measured. A spokesperson from the Ministry of Commerce stated that while progress has been made, “significant differences remain on key intellectual property issues.” This suggests headline risk could reverse the current sentiment quickly, a factor traders must watch.
Given this cautiously bullish tone, we believe derivative traders should consider buying short-dated call options on GBP/USD. This strategy offers upside exposure to the current momentum while capping potential losses if the trade talks falter. A bull call spread targeting a move toward 1.3000 could also be used to lower the upfront cost.
Technical Levels and Hedging Opportunities
This risk-on mood is further supported by last week’s UK inflation data, which saw the headline CPI figure dip to 1.9%, finally falling below the Bank of England’s target. While this may signal future rate cuts, for now, the market is interpreting it as evidence of a “soft landing” for the UK economy. Historically, currencies can strengthen in the early phase of an easing cycle if global growth prospects are improving simultaneously.
The GBP/USD pair has reclaimed its 20-day Exponential Moving Average, currently at 1.2810, suggesting a shift in short-term momentum. We are watching for a push towards the next resistance level near 1.2920, which was a key pivot point earlier this quarter. A failure to hold above the 20-day EMA would expose the support level around 1.2750.
With market volatility having declined, we also see an opportunity in using options on safe-haven currencies as a cheap hedge. Implied volatility on the Japanese Yen has fallen to its lowest level in over a year, making put options on USD/JPY an attractive way to protect against a sudden risk-off reversal. This could provide a cost-effective portfolio cushion against any sudden geopolitical disappointments.
