The GBP/USD pair is holding steady at around 1.3330 during the Asian session, as traders look forward to the US inflation report. The upcoming Personal Consumption Expenditures (PCE) Price Index for September may signal the Federal Reserve’s plans for interest rates. There’s much talk about a potential rate cut by the Federal Reserve next week, which could impact the US Dollar. Interest rate futures traders believe there’s an 89% chance of a quarter-point rate cut in December. The GBP/USD pair tried to reach 1.3350 but fell back below that level, taking away some earlier gains. Even though the Dollar Index has dropped for seven sessions, this has not significantly helped GBP/USD.

The Federal Reserve’s Decision

The Federal Reserve’s decision on December 10 is crucial. The market is expecting a third consecutive rate cut, with almost a 90% chance of a quarter-point cut next week, especially since official data lags after the federal shutdown. In the American session, the Pound Sterling climbed against the US Dollar, reaching 1.3367, the highest level since late October. Recent US data showed jobless claims fell to 191,000, lower than the predicted 220,000, down from previous estimates of 218,000. With GBP/USD stabilizing around 1.3330, we are closely watching the Federal Reserve’s interest rate decision on December 10. The market largely expects a rate cut, which could weaken the US dollar, creating a favorable opportunity for the pound.

Traders’ Strategies

The likelihood of a Fed rate cut has strengthened significantly. The release of the Non-Farm Payrolls report this morning revealed only 85,000 job additions, missing the forecast of 150,000 by a large margin. This weak labor data, combined with last week’s core PCE inflation drop to 3.2%, provides the Fed with enough reason to ease its policy. As a result, the CME FedWatch Tool now suggests a 92% chance of a 25-basis-point rate cut next week, lowering the Fed funds rate target to 3.50%-3.75%. Traders are responding by buying call options on GBP/USD, particularly with strike prices around 1.3400 and 1.3450. These options expire in late December and January and are based on anticipated dollar weakness after the Fed’s announcement. This situation is reminiscent of the Fed’s easing cycle in 2019, which led to a sustained rally in risk assets and a weaker dollar. While jobless claims were surprisingly low at 191,000 for the week ending November 29, the market is focusing more on the recent payroll data. We believe the US economy is softening, bolstering the case for a more dovish Fed stance. Therefore, traders should create strategies to benefit from an increasing GBP/USD. Besides straightforward call options, considering bull call spreads could reduce the initial cost of the trade. Managing positions through the Fed announcement on December 10 will be essential, as implied volatility is expected to be high. Create your live VT Markets account and start trading now.

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