Interest Rate Cut Speculations

The Pound Sterling rose against other major currencies after the UK released its GDP and industrial data for August. GDP grew by 0.1%, which met expectations. Industrial Production increased by 0.4%, recovering from a 0.4% drop in July and surpassing the forecast of 0.2%. Manufacturing Production also showed improvement, rising by 0.7% in August after a 1.1% decline in July, beating the expected 0.4% increase. These positive results give the UK government some relief as it prepares for the upcoming Autumn Budget, which may include tax increases to manage routine expenses. Concerns about the job market are fueling speculation about further interest rate cuts by the Bank of England. The unemployment rate rose to 4.8% in August, while the Bank of England anticipates inflation to peak at about 4% in September. After the GDP report, the Pound Sterling strengthened against the US Dollar, nearing 1.3440. The US Dollar is under pressure due to expectations of a dovish Federal Reserve and ongoing US-China trade tensions, hovering close to a weekly low. There’s a 94.6% chance the Fed will implement another rate cut this year. The GBP/USD pair remains unstable, fluctuating around the 20-day Exponential Moving Average near 1.3419. Support and resistance levels for this pair are at 1.3140 and 1.3500, respectively. The 0.1% growth in the UK economy for August gives the Pound a temporary boost, supported by better-than-expected manufacturing figures. However, we shouldn’t overreact to this single data point, as the overall economic trend remains weak. This short-term strength may not last. We need to consider the bigger picture regarding the UK’s economic performance. The economy struggled throughout 2024 and narrowly dodged a technical recession. This slight increase is from a very low starting point. With the ILO unemployment rate now at 4.8%, a level not consistently seen since the pandemic recovery, it’s clear the labor market is weakening.

Differences in Monetary Policy

Now, the focus shifts to the differences in monetary policy, which is likely to impact currency markets. The Bank of England is anticipated to cut interest rates again this year to assist the struggling economy. This marks a significant change from the high-rate environment aimed at controlling inflation, which peaked above 10% in 2022. In the US, the Dollar is also facing pressure, with markets anticipating a 94.6% probability that the Federal Reserve will make significant rate cuts. This overall weakness in the Dollar currently supports the GBP/USD pair, but we cannot expect this support to continue indefinitely. Any shift in the Fed’s strategy could diminish this support for the Pound. Given these mixed signals, we forecast increased volatility for the Pound in the upcoming weeks. This scenario suggests traders might use options strategies, like buying straddles or strangles on GBP/USD, to profit from significant price movements in either direction, particularly around the Autumn Budget announcement next month. This strategy allows traders to benefit from uncertainty without committing to a specific direction. For traders with a specific outlook, the fundamental situation appears bearish for Sterling beyond the short term. The combination of expected tax hikes in the budget and potential further rate cuts from the Bank of England poses significant challenges. Buying put options on the Pound could be a wise strategy in anticipation of a possible decline toward the 1.3140 support level witnessed in August. Create your live VT Markets account and start trading now.

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