The Pound Sterling faced a sell-off on Wednesday, and Gilt yields dropped unexpectedly ahead of the November budget. Market attention is on the Bank of England (BoE) as the UK’s fiscal tightening might push the BoE to lower interest rates sooner than expected. UK Chancellor Rachel Reeves is likely to stick to her fiscal rules and may tighten the budget further to make room for spending. Because of this, GBP swap rates have changed this month. The market now expects the BoE’s terminal rate to decrease to 3.25% by next summer.

Repricing Of The BoE Cycle

The adjustment in the BoE cycle may be enough right now, making chasing the pound above 1.3140/50 in GBP/USD or 0.8850/70 in EUR/GBP risky. If the BoE adopts a more aggressive stance, the sterling might regain some ground in the upcoming Monetary Policy Committee (MPC) meeting. Recently, the pound sterling has faced downward pressure. This seems less about a broader “Sell UK” trend and more about the BoE’s direction. The market is betting that government fiscal tightening will push the central bank to ease interest rates earlier than expected. These expected rate cuts have been heavily factored into the market over the last month. Swap rates now suggest the BoE could lower its terminal rate to as low as 3.25% by next summer. Overnight Index Swaps indicate almost a 75% chance the first rate cut could happen by the second quarter of 2026. However, the latest inflation report shows the Consumer Price Index (CPI) holding firm at 3.1%, providing the BoE with a reason to stay tough. This contrasts with recent GDP data showing a slight 0.1% decline in the third quarter, highlighting the tricky balancing act the bank faces. The mix of persistent inflation and a weak economy indicates that the market might have jumped the gun.

Trading Strategies For Traders

A similar scenario played out in late 2023 when the market aggressively priced in rate cuts for 2024, only for the BoE to counter with a hawkish stance. Given this background, pursuing a lower pound now could be risky. Critical support for GBP/USD stands at the 1.3140/50 level, which may be hard to break. For derivative traders, starting new bearish positions on the sterling seems unattractive. Instead, the risk now leans towards a short-term bounce, especially if the BoE keeps its hawkish tone at next week’s meeting. The strong bearish sentiment could trigger a sharp recovery if the central bank surprises investors. Traders might consider strategies that capitalize on a halt in the sell-off or a slight rebound. This could mean selling out-of-the-money GBP puts for premium income, betting that the 1.3140 support will hold strong. Alternatively, buying short-dated, low-cost call options could present a tactical opportunity for a relief rally after the MPC meeting. Create your live VT Markets account and start trading now.

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