Impact of Weak UK Economic Data

Traders are getting ready for US data releases following the government’s reopening. These reports could show a struggling economy, which may lead to a decline in the US Dollar. Currently, markets predict a near 54% chance of a 25 basis point rate cut in December, down from last week’s 62.9%, according to the CME FedWatch Tool. Factors affecting the Pound Sterling include the Bank of England’s (BoE) monetary policy, aimed at keeping inflation at 2% through interest rate changes. Economic data like GDP and Trade Balance also influence the Pound’s value. Strong economic indicators boost the Pound, while weak data tends to lower its value. With a strong possibility of a BoE rate cut, GBP/USD is likely to decline in the coming weeks. The market sees an 80% chance of a December cut, creating bearish sentiment for the Pound. This expectation shapes our trading strategies moving forward. Recent economic figures support this outlook. Final Q3 GDP data showed a 0.1% contraction, and October’s wage growth fell to 3.5%, a notable drop from earlier in the year. These numbers highlight that the UK economy is slowing, which puts pressure on the central bank to respond. Additionally, the government’s choice to drop a planned income tax increase before the November 26 budget reinforces this view. This shift suggests worries about economic weakness and a struggle to adapt to stricter policies. For traders, this indicates that monetary policy will likely need to provide significant support for growth, which suggests lower interest rates.

US Dollar and Rate Cut Probability

For the US Dollar, the situation is less straightforward, which emphasizes Sterling’s weakness. While markets expect a weaker US economy, the chance of a Federal Reserve rate cut in December remains around 54%. This difference in certainty between the BoE and the Fed makes shorting the GBP/USD pair an attractive option. Traders are increasing their positions in derivatives that gain value when the Pound falls. Buying GBP/USD put options with strike prices below 1.3100 is becoming a common strategy as they prepare for the anticipated drop. This method allows traders to participate in the downside while clearly defining their maximum risk. Looking back, we can see similarities to the period before the BoE’s easing cycle in 2019 when a sequence of weak data led to a significant drop in the Pound. Historically, Sterling tends to decline in the weeks leading up to a well-anticipated rate cut announcement. We expect this trend may repeat as we near the December meeting. Create your live VT Markets account and start trading now.

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