The Pound Sterling is struggling around 1.3400 against the US Dollar in late European trading. The US Dollar is experiencing strength, causing pressure on the GBP/USD pair, despite the ongoing US government shutdown now in its second week. The US Dollar Index, which tracks the Greenback against six major currencies, rose 0.35% to nearly 99.00, reaching a two-month high. As a result, the GBP/USD pair has fallen below the mid-1.3400s due to increased selling and growing interest in the US Dollar.

Impact of Domestic Political Strains

The US Dollar’s rise is influenced by a weaker Japanese Yen and Euro, both affected by domestic politics. Recent developments in Japan suggest more fiscal policies, leading to altered interest rate expectations from the Bank of Japan and a weaker Yen. In Europe, the resignation of France’s Prime Minister, Sebastien Lecornu, has impacted the Euro negatively while supporting the US Dollar. Additionally, the broader cryptocurrency market is slowly recovering, with Solana trading over $220, though on-chain activity remains low. It’s surprising that the US Dollar shows strength even during the second week of the government shutdown. This is putting pressure on the Pound Sterling, pushing GBP/USD closer to the 1.3400 level. Currently, traders seem to prefer the Dollar over other major currencies. This situation resembles the 16-day shutdown from October 2013, which delayed key economic reports and increased uncertainty. The current shutdown has halted data from the Bureau of Labor Statistics, leaving traders without updated job data. Usually, this situation makes the Dollar a safe choice as traders seek liquidity during uncertainty.

Domestic Factors Affecting the Pound

The Pound is also weak due to domestic issues. The latest UK inflation report from September showed a rate of 3.1%, slightly less than expected, reducing the Bank of England’s reasons for aggressive interest rate hikes compared to the US Federal Reserve. This difference in policies is a major factor affecting the GBP/USD exchange rate. In this context, we believe that positioning for further declines in GBP/USD using derivatives is wise in the coming weeks. Buying put options with strike prices around 1.3350 and 1.3300 could be a profitable strategy while keeping risks manageable. The implied volatility for the pair has increased from 8.5% to 9.2% in the past week, indicating that the market is preparing for significant movements. One key event to watch is the release of the Federal Open Market Committee (FOMC) minutes. The CME FedWatch Tool indicates a 74% chance of another Fed rate hike by December. However, if policymakers show caution due to the shutdown, it could lead to a sharp reversal. Traders should be ready for a possible slowdown in the Dollar’s rally if the minutes are more dovish than expected. Create your live VT Markets account and start trading now.

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