GBP/USD remained steady during Wednesday’s North American session, despite a UK inflation report that weakened the Pound Sterling. The pair steadied at 1.3362 after initially falling to 1.3305 when CPI data was released. The UK Consumer Price Index for September held steady at 3.8% year-over-year, missing the anticipated 4% increase. Core CPI dropped to 3.5% YoY, down from 3.6%, falling short of the expected 3.7% rise.

Market Outlook and Technical Analysis

Services inflation stayed at 4.7%, below the expected 4.9%, influencing market expectations for potential Bank of England rate cuts. Investors now expect a 19 basis point cut during the BoE’s December meeting, up from the earlier forecast of 11 basis points. In the US, the upcoming Federal Reserve meeting may lead to a 25 basis point rate cut, depending on the CPI report due on Friday. Technically, GBP/USD indicates a neutral to slightly negative outlook. A close above the 20-day SMA at 1.3399 could lead to testing the 50-day SMA at 1.3465. Conversely, a drop below 1.3300 might push the pair toward the October low of 1.3248. GBP/USD has already seen a 2% decline from mid-September highs, with recent data supporting this trend. The British Pound has performed its best against the Japanese Yen. With the UK inflation data falling short of expectations, derivative traders have a clear signal. The rising likelihood of a Bank of England rate cut in December suggests opening bearish positions on the Pound Sterling. This can be achieved by buying GBP/USD put options or selling futures contracts, with targets set below current support levels. The 3.8% inflation rate, while still high, marks a considerable drop from the peak of over 11% seen in 2022 and 2023. This historical context makes the current shortfall significant for the Bank of England’s future decisions. The steady services inflation of 4.7% reinforces the idea that disinflation is taking hold, giving the BoE more leeway to ease policy.

Strategy and Outlook

On the other hand, the US Federal Reserve is expected to cut rates next week as well, but the market has largely accounted for this. Continued investment in AI, a trend that began with the boom in 2023 and 2024, suggests ongoing productivity gains and strength in the US corporate sector, creating a scenario where the US Dollar becomes more appealing relative to the Pound. In the coming weeks, a sound strategy would be to buy GBP/USD put options with a strike price around 1.3300, set to expire after the December BoE meeting. This approach allows for potential gains from an expected downward move while limiting maximum losses. If the pair falls below the recent low of 1.3248, the next target would likely be the 200-day moving average at 1.3212. Expect increased volatility with the US CPI report on Friday and the Fed meeting next week. Traders might consider option spreads, such as a bear put spread, to reduce entry costs and define risk better. This involves buying a higher-strike put while simultaneously selling a lower-strike put. From a technical standpoint, any rally in GBP/USD towards the 20-day Simple Moving Average at 1.3399 should be seen as a selling opportunity. The pair has already declined about 2% from its mid-September high of 1.3726, and recent data strengthens the bearish momentum, suggesting the path of least resistance is downward. Create your live VT Markets account and start trading now.

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