The GBP/USD saw a slight increase of over 0.20% on Monday, reaching a trading level of 1.3250 after hitting a low of 1.3205 earlier in the day. This rise comes as traders anticipate a possible Federal Reserve rate cut in the upcoming week and changes in Fed leadership. During the European trading session on Monday, the Pound Sterling held steady at around 1.3230 against the US Dollar. Although the Pound experienced general weakness against other currencies, the US Dollar declined due to strong expectations of a Federal Reserve rate cut next week.

GBP/USD Early Trading

In the early European session, the GBP/USD pair dipped to about 1.3225 due to bearish trends. Nearly 87% of traders expect a 25 basis point cut when the Federal Reserve meets next week, which is affecting market movements. With the strong belief in a Federal Reserve rate cut, strategizing around a weaker US Dollar is crucial. The market suggests there is almost a 90% chance of a 25-basis-point cut, especially after last month’s Core CPI data showed a lower than expected figure of 2.8%. Consequently, purchasing put options on the US Dollar Index (DXY) provides a clear way to position for this, with manageable risks ahead of the FOMC announcement. While the Pound is gaining against the Dollar, its economic weaknesses call for caution. UK third-quarter GDP was flat just last month, and recent consumer confidence figures remain negative, creating challenges for the GBP. Therefore, rather than opting for a direct futures position, buying GBP/USD call options could be a smarter way to benefit from Dollar weakness while minimizing risks in case of unfavorable UK news.

Monetary Policy Divergence

A key trading opportunity seems to be the difference between US and Japanese monetary policies. With the Bank of Japan hinting at a potential rate hike—something we haven’t seen since moving away from negative rates in early 2024—the case for shorting USD/JPY is getting stronger. This policy divide suggests that put options or short futures positions on USD/JPY could yield significant returns in the weeks ahead. Growing market anxiety, shown by a falling Dow and the VIX index rising above 22, calls for cautious strategies. This heightened volatility indicates that buying VIX call options or futures could effectively protect against a broader market decline. We believe having some protection in place is wise, as a potential Fed rate cut may not alleviate concerns about a slowing global economy. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now