Fed Rate Cut Expectations

The CME FedWatch Tool shows a 97% chance of a Fed rate cut in October and a 96% chance in December. A Reuters poll reveals that 115 out of 117 economists expect a 25 basis point reduction to between 3.75% and 4.00% on October 29. Additionally, 83 economists predict two cuts this year, while 32 anticipate just one. The Pound Sterling has weakened after the UK’s Consumer Price Index (CPI) data for September showed a 3.8% rise, lower than the 4.0% expected. This remains above the Bank of England’s 2% target, with the core CPI at 3.5%, which fell short of the 3.7% forecast and dropped from August’s 3.6%. We see GBP/USD fall below the 1.3350 level as market uncertainty prevails. Investors are shifting to the US Dollar due to the government shutdown and the absence of official economic data. The Pound is under pressure after weaker September inflation figures. With US economic data on hold before the upcoming inflation report, nervousness is high, leading to potential price swings. The VIX, which measures market fear, has spiked over 25% this past month, reaching levels not seen since early 2024’s banking stresses. Traders should think about buying options for protection against sudden market moves.

Situational Analysis of GBP/USD

A Federal Reserve interest rate cut on October 29 seems nearly guaranteed, with fed funds futures indicating a 97% likelihood of a 25-basis-point reduction. Historically, similar situations have shown that initial rate cuts might not weaken the dollar if there’s significant concern about global growth. The current environment feels similar, so we shouldn’t assume a rate cut will automatically weaken the dollar. Looking at the UK, September’s inflation of 3.8% is still above the Bank of England’s 2% target, but it’s a nice drop from the 4.5% average in the second quarter of 2025. This decrease in price pressure lessens the urgency for the BoE to raise rates, limiting any upside potential for the Pound Sterling. Traders might consider selling out-of-the-money call options on GBP/USD, betting that it won’t rise significantly in the near future. Given the strong demand for the dollar and a cautious Bank of England, GBP/USD is likely to trend downwards in the coming weeks. Traders should explore strategies that benefit from this downward trend or at least increased volatility. This could involve buying put options on GBP/USD or establishing bearish futures positions, aiming for a move towards the 1.3200 support level last seen in July. Create your live VT Markets account and start trading now.

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