The GBP/USD is performing well, rising to about 1.3365 during Tuesday’s European session. This increase is due to better UK Retail Sales and S&P Global PMI data, along with expectations for a Federal Reserve rate cut. The movement of this currency pair is affected by a weakening US Dollar because of anticipated interest rate cuts by the Federal Reserve. Recent US inflation data shows that CPI is lower than expected, making a rate cut more likely, which impacts the dollar’s value.

The Federal Reserve Rate Decision

The Federal Reserve is expected to lower its key interest rate by 25 basis points at the upcoming meeting in October. Currently, traders see a 97% chance of the rate dropping to 3.75%-4.00%, which would be a second consecutive cut. Economic indicators in the UK, such as Retail Sales and PMI data, are supporting the Pound against the Dollar. The Bank of England (BoE) will announce its next interest rate decision in November, with varying opinions on whether a rate cut will happen. Economists believe the BoE may wait for the Chancellor’s Autumn Budget to evaluate its impact on inflation. The UK’s fiscal uncertainty and potential growth challenges could negatively affect the GBP.

US Dollar Expectation

The US Dollar is expected to weaken ahead of the Federal Reserve’s decision tomorrow, with almost a full price in for a 25 basis point cut. The latest US CPI data for September shows inflation cooling to 3.1%, giving the Fed a solid reason for what would be its second rate reduction in a row, following the cut in September 2025. This expectation helps boost the GBP/USD pair. Meanwhile, the Sterling benefits from strong domestic data that pleasantly surprised many. Retail sales in September increased by a healthy 0.6%, and the flash Composite PMI for October rose to 51.5, indicating ongoing economic growth. This resilience makes the BoE’s interest rate decision, scheduled for next week, more complex. For derivative traders, focusing on short-term call options on GBP/USD may be a smart move to take advantage of the expected Dollar weakness after the Fed meeting. Since the rate cut is widely anticipated, the implied volatility for this week isn’t very high, making options an appealing strategy. The Fed’s guidance will be crucial; a more dovish approach could sustain the rally. Looking ahead to November, there are significant events that could limit the Pound’s gains, particularly the Bank of England meeting on November 6 and the Autumn Budget on November 26. The BoE may adopt a ‘wait-and-see’ approach before the budget, which might slow the pound’s upward momentum. Thus, selling out-of-the-money call options with late November expirations could be a smart strategy, betting that the pair won’t rise significantly. Additionally, it’s important to note that the climb toward 1.3400 is testing levels not consistently seen since the first half of 2022. While the Fed’s policy shift is currently driving this trend, any lasting strength will heavily rely on clarity regarding the UK’s fiscal and monetary policies. Any disappointing news from the UK could lead to a sharp reversal from these multi-year highs. Create your live VT Markets account and start trading now.

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