Short the Slip Above 1.3500Fundamental Outlook: A stagflation trap
The UK economy continues to emit worrying signs of stagflation: inflation remains uncomfortably high, growth is weak, and the once-tight labor market is starting to soften. Consumer confidence has deteriorated, and house prices are experiencing record declines, a trend that underscores the fragility of household wealth and future consumption.
In this challenging context, any rally in the pound should be treated with caution. The broader macro backdrop still favors the US dollar, especially if incoming US data continues to support a "soft landing" narrative. In contrast, the UK's trajectory appears more constrained.
On monetary policy, the Bank of England is expected to maintain a predictable, yet clearly dovish, easing cycle through the second half of 2025. Market consensus leans toward a 25 bps cut in August, followed by a pause in September, then another cut in November. This gradual pace of easing may keep the pound under persistent pressure, especially if the Federal Reserve maintains a more stable or data-driven stance.
On the political front, Trump’s critical remarks toward Powell and evolving UK-US relations represent potential flashpoints. Any surprises here could further erode confidence in the pound.
Technical Analysis: Signs of breakdown below 1.34
The September futures contract (6BU2025) has dropped over 2.5% in a straight line during the first two weeks of July, pressuring the 1.34 USD support zone before rebounding in recent sessions. So far, each rebound attempt has been met with consistent selling, and the brief move above 1.3500 appears fragile, offering a potential short opportunity to re-enter the previous range.
A sustained daily close below 1.3370 would likely pave the way for further downside toward the 1.32 level, which hasn’t been visited since May 13th. Notably, the volume profile reveals a liquidity vacuum in that region, potentially acting as a price magnet.
Overall, the technical setup favors another leg lower, barring the emergence of a strong bullish catalyst capable of reversing the prevailing trend.
Sentiment Analysis: Mixed but fragile
From a positioning standpoint, the CFTC's latest Commitment of Traders (COT) report shows asset managers increasing their bearish exposure. Net short positions grew from 13,154 to 27,611 contracts, hinting at rising institutional pessimism toward the pound.
In the FX/CFD retail segment, positioning remains relatively balanced. However, we notice a pattern: retail traders tend to increase long exposure on dips, profiting from short-term rebounds, a classic contrarian signal that the market may still have room to move lower.
Volatility remains muted, with the VIX trading below 17, close to its annual lows. This low-volatility environment tends to reinforce technical trading patterns and increases the likelihood that price respects key support/resistance zones, unless jolted by surprise macro events.
Options Market: Downside risk priced in
In the listed options market, we see a clear asymmetry in favor of downside protection. Out-of-the-money (OTM) puts trade at higher premiums than equivalent calls, confirming a market pricing greater fear of a GBP decline.
Open interest (OI) is notably concentrated in the 1.34–1.35 strike zone. This suggests potential pinning around these levels near expiry, but also highlights the risk of increased volatility if the spot price deviates sharply. A move away from this cluster could spark rapid adjustments in hedging flows, adding fuel to the next directional move.
Trade Ideas: Two ways to play the bearish bias
1. Classic directional strategy
Entry: Short at current price (around 1.3535)
Stop Loss: Daily close above 1.3602 (Volume Profile Point of Control)
Take Profit 1: 1.3370 (recent support)
Take Profit 2: 1.3200 (liquidity void)
This strategy targets a clean technical setup with clearly defined risk. A break below 1.3370 would confirm downside momentum and offer a high-reward second leg toward the 1.32 region.
2. Alternative strategy: Replace your stop loss with an OTM call option
Rather than exiting prematurely via a hard stop loss in case of a false breakout, consider purchasing an OTM call option as a form of insurance. This allows you to stay in the trade while limiting your maximum loss.
For instance, buying the August 1.355 call, currently trading around 0.0059 on CME (59 ticks), caps your loss in the event of an unexpected breakout above resistance. If the cable squeezes sharply higher, the call option will compensate part or all of the loss on the short position beyond the strike price.
This hybrid approach works particularly well in setups like this one, where fundamentals and sentiment support a bearish outlook, but positioning and low volatility leave room for abrupt technical counter-moves.
Final thoughts
The pound faces an increasingly precarious setup. Fundamental conditions in the UK remain soft, monetary policy is turning more accommodative, and political uncertainty looms large. Meanwhile, technical and sentiment indicators tilt bearish, and the options market reflects elevated downside risk premiums.
In short, while the market may already be pricing in some of this pessimism, the risks of a deeper GBP correction remain high. Traders should watch upcoming catalysts, BoE and Fed meetings, US/UK economic data, and geopolitical signals, and adjust positions accordingly.
Until we see a clear shift in macro data or a breakdown in technical patterns, fading rallies remains a strategy with attractive risk/reward potential.
---
When charting futures, the data provided could be delayed. Traders working with the ticker symbols discussed in this idea may prefer to use CME Group real-time data plan on TradingView: tradingview.com/cme/ .
This consideration is particularly important for shorter-term traders, whereas it may be less critical for those focused on longer-term trading strategies.
General Disclaimer:
The trade ideas presented herein are solely for illustrative purposes forming a part of a case study intended to demonstrate key principles in risk management within the context of the specific market scenarios discussed. These ideas are not to be interpreted as investment recommendations or financial advice. They do not endorse or promote any specific trading strategies, financial products, or services. The information provided is based on data believed to be reliable; however, its accuracy or completeness cannot be guaranteed. Trading in financial markets involves risks, including the potential loss of principal. Each individual should conduct their own research and consult with professional financial advisors before making any investment decisions. The author or publisher of this content bears no responsibility for any actions taken based on the information provided or for any resultant financial or other losses.
