During the North American trading session on Monday, GBP/USD held steady at 1.3166 as traders awaited the US Nonfarm Payrolls report. The US Dollar is regaining strength due to last week’s strong comments from the Federal Reserve, changing expectations for a rate cut in December. The CME FedWatch Tool shows a 43% chance of a 25-basis-point cut. Please note that advice and accuracy are not guaranteed, and references to brokers are for informational purposes only. The author does not have positions in the mentioned stocks.

Market Concerns Over UK Fiscal Path

The GBP/USD pair is struggling around the 1.3150 level, reflecting worries about the UK’s fiscal path. The choice to eliminate income-tax increases, despite a revised lower budget deficit, creates uncertainty about future funding. This indicates that any strength in the pound may be short-lived, opening up opportunities for bearish bets. Expectations for a Bank of England rate cut in December are growing, which is putting pressure on Sterling. Overnight index swaps are pricing in a higher than 70% chance of a 25-basis-point cut next month, a notable change after weak Q3 growth figures. This divergence from the more cautious Federal Reserve makes shorting the pound against the dollar an increasingly attractive trade. This week’s UK inflation data will be crucial for the pound’s next move. We anticipate the CPI figure will dip below 3% year-over-year, signaling the Bank of England to ease policy. Recall how a similar drop in late 2023 led to a dovish pivot, and we expect a similar market reaction now.

US Dollar’s Strength and Trading Strategy

Meanwhile, the US dollar is stabilizing as Federal Reserve officials resist the idea of imminent rate cuts. Although the market sees a possibility for a December cut, upcoming Nonfarm Payrolls data could change those odds. A strong jobs report, showing numbers above the expected 180,000, would likely boost the dollar and push GBP/USD closer to the 1.3000 level. Given the current situation, we should consider buying GBP/USD put options with strike prices below 1.3000. These options would benefit from a continued decline in the currency pair, driven by weak UK data and differing central bank policies. Expirations in late December 2025 or January 2026 would capture the potential volatility around the next central bank meetings. Looking back at the market turmoil after the unfunded tax cuts in autumn 2022 reminds us how sensitive currency markets are to UK fiscal policies. While the current scenario is less dramatic, this history clearly affects trader sentiment. Any further signs of fiscal looseness without a solid plan to cover it will likely be negatively received. Create your live VT Markets account and start trading now.

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