The Pound Sterling (GBP) has remained strong despite worries about the Autumn Budget. Support comes from stable gilt markets and cautious growth predictions from the Office for Budget Responsibility (OBR). Additionally, a declining US Dollar (USD) and anticipated rate cuts by the Federal Reserve have boosted the GBP’s performance. The GBP seems to be ignoring criticism of Chancellor Rachel Reeves and fears about potential fiscal issues, which the markets view as exaggerated. The OBR’s cautious growth forecast, no surprising budget changes, and the government’s commitment to stricter spending have helped maintain market stability.

GBP Dollar Rally

Markets are focusing on the weakening USD rather than budget concerns, as shown by the 1.1% rise in the GBP/USD pair, which has returned to levels seen in late October at 1.3353. This movement in currency suggests that expectations for Federal Reserve rate cuts are affecting the GBP more than any changes in Bank of England policies. The Pound has shown strength, holding steady near the 1.3350 level despite the Autumn Budget. The main factor is the easing US Dollar, boosted by hopes for Federal Reserve rate cuts in the upcoming year. Recent US job data from November, indicating a slowdown in non-farm payroll growth to just 95,000, has reinforced this belief. For traders anticipating further gains, buying call options on GBP/USD with strike prices around 1.3450 or 1.3500, expiring in January 2026, might be a good strategy. This approach helps manage risk if the dollar’s weakness unexpectedly changes. Last week, FX volatility indexes dropped to their lowest levels in months, making option premiums appealing for positioning.

Policy Divergence

A key factor here is the policy difference between a dovish Fed and a more cautious Bank of England. While markets expect Fed rate cuts by March 2026, the UK’s core inflation rate, last reported at 3.5%, indicates that the Bank of England may take longer to react. This situation is similar to past periods in the early 2010s when the Fed’s easing significantly impacted the dollar. We also see stability in the UK Gilt market, which contrasts sharply with the turmoil following the ‘mini-budget’ in late 2022. The 10-year Gilt yield has stayed below 4.1% since the budget announcement. This fiscal responsibility supports the pound and prevents the kind of crisis-driven selling we experienced a few years ago. With low volatility and clear policy differences, carry trade strategies are becoming more attractive. Traders can utilize forward contracts to secure the interest rate difference between the UK and the US. As long as market calm remains, gathering this yield while benefiting from possible spot appreciation is a practical strategy for the upcoming weeks. Create your live VT Markets account and start trading now.

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