GBP/USD is trying to stabilize around 1.3150, as traders await the Bank of England’s interest rate decision. A rebound hasn’t happened, which could mean more volatility for the Pound Sterling. The Institute for Supply Management’s Purchasing Managers Index fell to 48.7 in October, down from 49.1 in September. Although demand indicators showed some improvement, they are still in contraction, indicating ongoing challenges in the manufacturing sector. This has been declining for eight months in a row.

Private Data Issues Amid US Government Shutdown

With the US government currently shut down, there’s a greater reliance on private data. However, these datasets are often inaccurate. The lack of official data raises the risk of misinterpretation due to low response rates and recency bias impacting investor decisions. In the UK, all eyes are on the Bank of England’s interest rate decision, with most expecting no changes. The Monetary Policy Committee is likely to vote six-to-three to keep rates steady. A vote for a rate cut could grab attention from those watching policy shifts, but no changes are expected since the UK’s inflation rate is at 3.8%, well above the Bank’s 2% target. Currently, GBP/USD is having trouble moving away from the 1.3150 level as the week starts. This level has been significant for us in the past, especially during the market volatility of early 2020. As the market waits for a catalyst, trading is expected to stay choppy. The latest US manufacturing data is worrying, showing a continuous decline for eight months with a reading of 48.7. This pattern of weakening is often seen before broader economic downturns, such as before 2008. This should be putting pressure on the dollar, but the market isn’t fully adjusting to it yet.

Impact of the US Government Shutdown

The ongoing US government shutdown, now in its third week, complicates matters by pushing us to depend on private surveys that have low response rates. A similar situation occurred during the late 2018 shutdown, leading to erratic market movements due to unreliable data. Traders should be careful not to overreact to any private data until official numbers come back. Looking ahead to Thursday, the Bank of England is not expected to cut rates. With inflation stubbornly high at around 3.7%, above the 2% target, they have little room to maneuver. This policy standstill means the pound lacks a strong bullish driver from the central bank. In this climate of range-bound activity and high event risk, it’s a better time to sell options premium rather than make directional bets. The one-week implied volatility for GBP/USD options has risen to over 10% ahead of the BoE meeting, compared to last month’s average of 7%. Strategies like short strangles or iron condors around the 1.3150 level could benefit from the expected price fluctuations and the following drop in volatility. Create your live VT Markets account and start trading now.

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