GBP/USD has hit a two-month low, while the US Dollar Index (DXY) has reached a 9-week high at 99.39. A drop in US stocks has boosted the US Dollar, pushing GBP/USD down to 1.3314, a 0.67% decline and the lowest level since August 6. Bloomberg reports that funds are bracing for more US Dollar strength. Hedge funds are betting on the Dollar’s continued rise as European and Asian funds engage in options trading, expecting the Euro and Yen to weaken against it.

More Bearish Option Trades

The Chicago Mercantile Exchange indicates a significant rise in bearish option trades on the Euro against the Dollar. There are three times as many bearish trades as bullish ones. The ongoing US government shutdown is also contributing to the US Dollar’s strength. Catherine Mann from the Bank of England has pointed out that UK inflation expectations are still high, around 4%. This means interest rate cuts are likely delayed until 2026. Concerns also surround the upcoming UK Autumn Budget, which may emphasize fiscal discipline and higher taxes, affecting economic stability. Meanwhile, the British Pound has shown strength against the Japanese Yen. With GBP/USD falling to 1.3314, it’s a good time to focus on US Dollar strength. The US Dollar Index hitting a nine-week high of 99.51 signals strong momentum that is expected to continue. This is backed by last week’s Non-Farm Payroll report, which showed the US added 210,000 jobs, far exceeding the expected 185,000 and reinforcing a strong American economy.

Hedge Fund Strategies and Risks

Hedge funds and institutional investors are increasingly betting on a stronger dollar as the year ends. Data from the Commodity Futures Trading Commission (CFTC) shows that net long positions on the US Dollar have risen for five weeks in a row, reaching the highest level since February 2025. The high volume of bearish option trades on the Euro supports the overall sentiment for dollar strength. On the other hand, the Pound faces challenges domestically. Catherine Mann’s warning about UK inflation remaining near 4% has dampened hopes for rate cuts until 2026. Recent inflation data from the Office for National Statistics shows the UK’s Consumer Price Index at 4.1% year-over-year, putting pressure on the central bank and affecting economic growth. For derivative traders, this environment suggests a further drop in GBP/USD in the coming weeks. Consider buying put options with strike prices below 1.3250 and targeting expirations in late November or December to take advantage of year-end dollar strength. Selling GBP/USD futures contracts is also a direct way to express a bearish outlook on the pair. This strategy isn’t limited to the Pound, as the dollar is strengthening against several G10 currencies. Bearish option volumes on the Euro are three times higher than bullish ones, making EUR/USD puts attractive. Looking at the cross-currency table, we see the Pound’s notable strength against the Japanese Yen, suggesting that a long GBP/JPY position could serve as a hedge against any sudden shifts in dollar sentiment. However, we need to stay alert to potential risks, such as the ongoing discussions about the US government shutdown. Although the market has largely overlooked this so far, we remember that during the lengthy shutdown that began in December 2018, the Dollar’s upward momentum eventually stalled and pulled back slightly. Any unexpected agreement between Democrats and Republicans could lead to a quick, albeit likely temporary, fall in the Dollar. Create your live VT Markets account and start trading now.

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