GBP/USD saw a slight rise of 0.10%, reaching around 1.3150. This change was mainly due to careful comments from the Federal Reserve and limited economic data. The exchange rate bounced back after hitting a low of 1.3095, amid ongoing worries about the US government shutdown affecting economic confidence. The US Dollar Index (DXY) fell by 0.27%, finishing at 99.45. It slightly recovered after reaching a six-month high of 100.36. Meanwhile, the US consumer sentiment index dropped from 53.6 to 50.3 in November. The extended government shutdown raised fears about the economy, with estimates suggesting a possible GDP decrease of up to 1.5%.

Fed Rate Cuts in Focus

Fed Vice Chair Philip Jefferson mentioned a cautious approach to rate cuts since the shutdown affects available data. Inflation expectations have changed a bit, with one-year forecasts rising to 4.7% and five-year expectations falling to 3.6%. The technical outlook for GBP/USD indicates a small recovery, but the pair is still trending down, remaining below the 200-day Simple Moving Average at 1.3261. To show control, market players need a break above 1.3200, while weakness might test the 1.3020 level. The lack of economic data due to the US shutdown is influencing currency movements and prompting careful market assessments. The drop in US consumer sentiment to 50.3 is concerning, placing it close to historic lows seen in mid-2022. This reflects significant economic anxiety connected to the prolonged government shutdown. The recent weakness of the US Dollar could persist as long as Washington remains inactive.

Expecting Market Volatility

The Federal Reserve is essentially navigating without key economic data, suggesting that they will hold off on major policy changes. Jefferson’s comments about taking a slow approach to rate cuts underline this cautious strategy. This uncertainty may keep the dollar under pressure against other currencies like the Pound. Given this environment, market volatility is likely to increase. The Congressional Budget Office estimated that the 35-day shutdown from 2018-2019 reduced GDP by 0.2% in the following quarter, making the White House’s current warning of a potential 1.5% drop seem quite serious. Buying options that benefit from increased price fluctuations, such as straddles on major currency pairs, could be a smart approach. For GBP/USD specifically, the easiest path appears to be upward as long as it stays above the 1.3000 support level. We might look to buy call options targeting a rise above the key 200-day average around 1.3261. This could allow us to take advantage of potential dollar weakness while managing our risk effectively. The trend to safer investments is reflected in gold prices rising above $4,000 an ounce, indicating deep concerns that extend beyond the immediate effects of the shutdown. This supports the overall risk-off sentiment, typically benefiting haven currencies. This situation makes selling puts on the Swiss Franc or Japanese Yen against the dollar another appealing strategy. Create your live VT Markets account and start trading now.

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