The GBP/USD exchange rate is close to 1.3100 due to political tensions in the UK affecting the Pound. There are worries about a possible leadership challenge to Prime Minister Keir Starmer, especially with the upcoming release of the UK fiscal budget. These concerns have caused the GBP/USD pair to drop by 0.34%, now sitting at 1.3105. Rumors of a challenge against Starmer, combined with UK jobs data showing a 5% unemployment rate, have increased the likelihood of a Bank of England (BoE) rate cut in December to 90%. Wage growth is slowing, raising expectations for a 25 basis-point cut.

The US Dollar Impact

In the US, the Dollar Index (DXY) is stable at 99.58 as markets await a vote that could end the government shutdown. An article from the Wall Street Journal indicates that the shutdown might end soon, boosting demand for the US Dollar. The House is expected to vote on a bill regarding the shutdown later today, which could affect the release of economic data. Technically, the GBP/USD trend is downward, with the possibility of falling below 1.3100. If the rate closes above this level, it may stabilize between 1.3100 and 1.3150. A table showing currency performance reveals that the British Pound is performing best against the Japanese Yen. The political instability surrounding Prime Minister Starmer and the upcoming UK budget announcement is putting significant pressure on the Pound. This suggests we should position ourselves for further weakness in the Pound against the Dollar. One direct approach is to consider buying GBP/USD put options that expire in late December to take advantage of a potential rate cut from the Bank of England.

Market Reactions and Predictions

The case for a BoE rate cut is becoming clear, with markets now pricing this at a 90% probability. The latest ONS data shows that the UK CPI fell to 2.8%, reaching the BoE’s target more quickly than expected, providing dovish members with the justification they need. Overnight Index Swaps are fully pricing in a 25-basis-point cut from the Bank of England on December 18th, making it the most likely outcome. On the other hand, the US dollar’s strength from the potential end of the government shutdown may only be temporary. Although an agreement would avoid a crisis, markets are also predicting an 80% chance of a Federal Reserve rate cut next month. This possibility could limit any major rally for the Dollar, making a short position on GBP more appealing. We should also get ready for a surge of delayed US economic data once the government offices reopen. Looking back at the 2013 shutdown, we noted a temporary dip in hiring metrics, so we expect the delayed October non-farm payrolls data to fall below the 150k consensus. A weaker jobs report would strengthen expectations for a Fed rate cut and exacerbate the GBP/USD decline. Given these factors, the 1-month implied volatility for GBP/USD options has risen to 9.5%, the highest level since the mini-budget crisis in 2022. This indicates increased trader anxiety and rising option costs, so it’s wise to secure bearish positions quickly. A good strategy is to target put option strike prices below the 1.3100 level, such as 1.3000 or 1.2950, in the coming weeks. Create your live VT Markets account and start trading now.

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