The Pound Sterling has dipped slightly against the US Dollar, reaching around 1.3340, as the focus shifts to upcoming US inflation data. This comes as forecasts increase for the Bank of England (BoE) to further cut interest rates. Currently, there is a 78% chance of a 25 basis point (bps) rate cut by the BoE, up from 46% earlier this week. This follows UK inflation data from September, which suggests that inflation has peaked, with core CPI at 3.5%, down from 3.6% in August.

UK Gilt Yields

Short-term UK gilt yields have fallen, with 10-year yields hitting their lowest point in 10 months at 4.37%. At the same time, the US is preparing to announce software export restrictions to China, which could apply to a wide range of goods. The US Dollar Index has increased slightly by 0.2%, trading near 99.10. The forthcoming US CPI data is expected to show a year-on-year rise to 3.1%. Traders anticipate that the Federal Reserve may also reduce interest rates by 25 bps in its last two meetings of the year. Worldwide, the US’s plans to restrict exports to China might impact various software-related goods. The British Pound has shown mixed performance against major currencies but is currently strongest against the Japanese Yen. As the Pound weakens against the Dollar, it’s essential to consider the differences between the Bank of England and the US Federal Reserve. The BoE seems poised to cut interest rates, potentially as soon as December, as UK inflation shows signs of peaking. This dovish approach is putting pressure on the Sterling. Market expectations indicate a strong likelihood of a BoE rate cut to 3.75% before the year ends. Recent UK inflation data support this view, as core inflation slowed to 3.5% in September, a significant change from the inflation worries that persisted throughout 2024. In contrast, the US may be experiencing a rebound in inflation, with the upcoming CPI report for September expected to show an increase to 3.1%. If the numbers exceed expectations, it could challenge market assumptions about two Fed rate cuts this year. Thus, tomorrow’s US CPI release is crucial for the GBP/USD pair moving forward.

US Dollar Opportunity

This policy divide creates a clear chance to position for a stronger US Dollar against the Pound. If US inflation surpasses the 3.1% consensus, the GBP/USD pair is likely to decline. Derivative traders might consider purchasing put options on the Pound to hedge against or speculate on a drop below the 1.3300 level. The bond market backs this outlook, with 10-year UK gilt yields falling to a 10-month low of 4.37%, reflecting the BoE’s dovish stance. We should look for a rise in US Treasury yields after the CPI data, which would confirm this separation. The last notable policy split occurred in late 2023, leading to significant Dollar strength. Additionally, renewed trade tensions with China are enhancing the Dollar’s attractiveness. The US plan to restrict software exports starting November 1st marks a significant escalation from earlier semiconductor restrictions. This uncertainty usually boosts demand for the US Dollar as a safe-haven currency. From a technical viewpoint, the GBP/USD pair is vulnerable while below its 20-day moving average, which is around 1.3404. A decisive drop below the 1.3300 psychological level could signal a move toward the August low of 1.3140. Any short-term rallies toward 1.3400 might offer selling opportunities. Create your live VT Markets account and start trading now.

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