The Pound Sterling (GBP) has been falling against the US Dollar (USD), with the GBP/USD briefly dropping below 1.3150. This shift is mainly due to expectations surrounding a US-China trade agreement and the anticipated dovish announcements from the US Federal Reserve. Recent progress in the US-China trade talks, particularly regarding export controls and shipping levies, has also impacted the market. On October 24, the US Bureau of Labor Statistics reported that the Consumer Price Index rose by 0.3% in September, bringing the annual inflation rate from 2.9% to 3%. This figure was lower than the expected 3.1%.

Bearish Trend Continues

The GBP/USD pair remains weak, close to its lowest level since April 14, indicating a continued bearish trend. Federal Reserve Chair Jerome Powell’s recent comments about not expecting an interest rate cut in December have further bolstered the USD, despite concerns about economic risks linked to a potential US government shutdown. It’s notable that the pound was trading above 1.3100 not long ago, as market dynamics have shifted dramatically since then. Currently, GBP/USD is struggling to maintain the 1.2450 level, signaling a clear long-term downtrend. The previous focus on a US-China trade deal has now shifted to persistent inflation issues on both sides of the Atlantic. The current main factor affecting the market is the differing inflation rates. The latest data from the US Bureau of Labor Statistics shows that annual inflation has eased to 2.8%, approaching the Federal Reserve’s target. In contrast, data from the UK’s Office for National Statistics shows inflation stubbornly high at 3.5%, leading the Bank of England to adopt a stricter policy.

Policy Gap and Market Strategy

This gap in policy is crucial for our strategy in the upcoming weeks. The Bank of England is likely to keep its base rate at 5.0% well into the new year to tackle price pressures. Meanwhile, the market is considering that the US Federal Reserve may start cutting rates by the second quarter of 2026, a significant shift from its previous hawkish stance. With this in mind, we should rethink our bearish positions on the pound. The UK’s interest rate advantage over the US could create a support level for GBP/USD, limiting further declines. Derivative traders might consider buying call options to prepare for a possible rebound, as the pound could strengthen if the Fed makes more explicit signals about rate cuts. Implied volatility for GBP/USD options has been decreasing, making them relatively inexpensive to buy. This situation offers an opportunity to create low-cost trades that could benefit from a recovery or stabilization above the 1.2400 level. We are looking at longer-dated call spreads to take advantage of a potential gradual increase through the first quarter of next year. Create your live VT Markets account and start trading now.

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