The GBP/USD pair has been climbing for three days in a row. It is currently trading in the mid-1.3400s, moving away from its recent low of about 1.3250. This rise is partly due to a weaker US Dollar, but the gains are modest and lack strong upward momentum. UK employment data has led to speculation about future rate cuts by the Bank of England. However, the pound’s growth is limited. Concerns about the UK’s fiscal outlook and the upcoming Autumn budget make traders cautious about betting heavily on the GBP, which affects the GBP/USD performance.

Sterling’s Recovery

The GBP/USD has continued its recovery, supported by slight UK GDP growth and a weaker US Dollar in the context of US-China trade tensions and a prolonged US government shutdown. Sterling has gained over one percent in the last two days and is currently trading around 1.3431, recovering from a drop earlier this week. Traders expect two upcoming 25-basis-point interest rate cuts by the Federal Reserve. While the GBP/USD could rise, it faces challenges like a technical barrier near the 50-day EMA at 1.3450 and a cautious market sentiment that might impact its direction. As we approach the weekend, the GBP/USD is gaining momentum, driven by a generally weaker US Dollar. However, traders should be careful as the pair faces resistance around the 50-day moving average of 1.3450, which has held in previous attempts. The ongoing US government shutdown, now in its third week, is weakening the US Dollar. Economic forecasts suggest that each week of the shutdown may reduce Q4 GDP growth by about 0.2%, increasing market worries. As a result, derivative markets are pricing in a high probability of a Federal Reserve rate cut this month. The CME FedWatch Tool shows over 90% likelihood of a 25-basis-point cut on October 29th.

Impact of the British Pound

Despite the GBP’s improvements, it faces challenges that could limit significant gains. Recent data showed UK unemployment unexpectedly rising to 4.4%, raising concerns that the Bank of England may need to cut rates further. Ahead of the November budget presentation, anxieties about the UK’s fiscal situation are increasing, particularly with the national debt-to-GDP ratio still over 100%. For those trading derivatives, this situation encourages options strategies rather than direct bets on futures. Given the resistance and challenges facing the pound, buying put options with a strike price below 1.3300 could be an effective way to hedge against price declines. Alternatively, if traders expect the market to stay within a certain range, selling out-of-the-money calls above 1.3550 could be a way to earn premium income. This cautious mood is reflected in the wider market, as the VIX volatility index has risen above 20. This increase in expected volatility makes options pricier but also more valuable as hedges against sudden market changes. This situation is similar to the volatility spikes seen during the sovereign debt concerns in the early 2020s, where protection against volatility became essential. In this risk-averse environment, investors are turning to safe-haven assets like gold, which is near its all-time highs. Derivative traders might consider using call options on gold ETFs to gain potential upside while managing risk. This strategy aligns with historical trends, where uncertainty in major economies drives investment toward traditional safe-haven assets. Create your live VT Markets account and start trading now.

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