GBP/USD dropped below its 200-day Simple Moving Average (SMA) of 1.3331, declining by 0.21% on Tuesday as traders awaited the Federal Reserve’s policy decision. The pair traded under 1.3300 after hitting a session high of 1.3356 earlier in the day. During the European session, the Pound Sterling stayed within a narrow range above 1.3300 against the US Dollar, with traders anticipating the Federal Reserve’s announcement. Although there was some buying during the Asian session, GBP/USD didn’t see strong follow-through as traders remained cautious ahead of the central bank’s event.

US Dollar Strengthens

The US Dollar has gained strength thanks to solid jobs data, putting pressure on various currency pairs, including GBP/USD and EUR/USD. EUR/USD retreated toward the 1.1600 level as the market braced for a likely 25 basis point rate cut from the Federal Reserve. In other markets, Gold remained above $4,200 but lost some momentum. The crypto market showed mixed signals; Bitcoin traded above $90,000, while altcoins held key support levels in a risk-off atmosphere. Ethereum surged by 6%, driven by whale accumulation and expectations around the Federal Reserve’s decision. The entire market is eagerly awaiting the Federal Reserve’s interest rate decision tomorrow. A 25 basis point cut seems almost certain, especially after the latest jobs report indicated that the U.S. economy added a strong 210,000 jobs last month. This strength allows the Fed to present the cut as a minor adjustment rather than a reaction to an economic crisis. For traders focused on GBP/USD, the recent drop below the 200-day moving average at 1.3331 sends a bearish signal. While a Fed cut should usually weaken the dollar, the UK’s sluggish Q3 GDP growth of just 0.1% is preventing the pound from rising. This situation suggests that selling call options above 1.3400 could be a smart way to capitalize on the pair’s limited upside potential.

Trading the Fed Event

The best way to trade this event is by focusing on market volatility. Implied volatility for short-term dollar options has increased sharply, which is common ahead of significant central bank announcements. We recommend buying straddles or strangles on major pairs like EUR/USD, as a surprising move from the Fed could lead to significant fluctuations. It’s important to recall what happened during similar events in the past, such as the Fed’s shift to cutting rates in 2019. The first market reaction isn’t always the lasting one, as traders quickly analyze the details of the statement and economic projections. A “hawkish cut,” where the Fed indicates it doesn’t plan more cuts, could lead to a strong dollar rally. This environment is also favorable for assets like gold, which has been trading comfortably above $4,200 per ounce. Lower interest rates reduce the opportunity cost of holding non-yielding gold, making it more appealing. However, any signal from the Fed that inflation is still a concern might quickly push gold prices down. Create your live VT Markets account and start trading now.

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