GBP/USD has bounced back to 1.31 as the Pound gains strength. This rise is happening despite high inflation expectations, suggesting the Bank of England (BoE) might soon cut interest rates. The BoE’s Monetary Policy Committee recently surprised many by keeping interest rates steady with a narrow five-to-four vote. This indicates that the BoE might change its approach due to ongoing economic difficulties, even with inflation currently at 3.8%.

Impact of US Government Shutdown

The US government’s shutdown has delayed the release of the latest Nonfarm Payrolls data. Attention is now on private data, with the University of Michigan’s Consumer Sentiment and Consumer inflation expectations surveys still scheduled for release. The Pound Sterling, the official currency of the UK, plays a crucial role in global foreign exchange, making up 12% of all transactions. Its value is affected by the BoE’s monetary policy, which aims for a steady inflation rate around 2%. Economic indicators like GDP and trade balance also impact the Pound. A positive trade balance boosts the currency, while weak economic data can cause it to decline. Given the BoE’s unexpected close vote of 5-4 to maintain rates, we think the market has been too negative about the Pound. Recent data from the Office for National Statistics (ONS) show UK CPI stubbornly holding at 3.6%, but the BoE appears more focused on the nation’s sluggish economic growth. This suggests that the recent rise in GBP/USD above 1.31 might continue.

Volatility and Trading Strategies

It’s time to rethink short positions, as the likelihood of a rate cut is now higher than the market had anticipated. Recent data from CFTC shows that speculative net short positions on GBP are at their highest levels since Q3 2024, indicating that the bearish sentiment is overcrowded. This positioning might lead to a sharp short-squeeze if the exchange rate keeps rising. This uncertainty from the BoE creates opportunities for higher volatility, which is essential for derivative traders. The 3-month implied volatility for GBP/USD options has surged to over 10.5% this week, up from below 8% throughout October 2025. Strategies that capitalize on price fluctuations, like buying straddles, may be effective in the coming weeks. On the other side, the ongoing US government shutdown is causing a lack of data, with essential reports like Nonfarm Payrolls on hold. This situation leads us to rely more on private surveys, such as today’s University of Michigan report, which could trigger sudden, unpredictable movements in the dollar. This scenario is reminiscent of the extended shutdown from late 2018 to early 2019, which also led to similar data gaps and market unease. Given the BoE’s unexpectedly dovish stance and the uncertain outlook from the US, GBP/USD may now trend upward. However, the risk of a sudden reversal remains significant due to persistent inflation issues in the UK. Using call options for bullish exposure could be a wise strategy, limiting potential losses to the premium paid while still participating in any further gains. Create your live VT Markets account and start trading now.

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