The GBP/USD exchange rate rose by 0.26% as the US government shutdown entered its third day, halting the release of Nonfarm Payroll data. The ISM Services PMI for the US dropped to a neutral level of 50, indicating slower business activity and a tough job market.

Central Banks Diverge

The Federal Reserve’s focus on data has been disrupted by the shutdown, making it harder to provide clear policy guidance. The US services PMI beat expectations, reaching 54.2, while the UK’s services PMI fell to a five-month low of 50.8, coming in below forecasts. The Federal Reserve may reduce rates by 25 basis points, while the Bank of England is likely to keep rates steady. UK inflation is expected to rise from 3.8% to 4% year-on-year. This week, the British Pound showed the strongest performance against the Canadian Dollar. We observe a clear difference in central bank policies that will influence currency movements. With UK inflation remaining stable around 3.8%, similar to August 2023, the Bank of England is expected to maintain interest rates. Conversely, the US Federal Reserve may consider a 25 basis point cut due to a slowdown in economic activity. The ongoing US government shutdown is creating a data gap for the Federal Reserve. Without crucial reports like Nonfarm Payrolls, policymakers must depend on less reliable data, such as the recent ISM survey, showing a decline in employment. This uncertainty forces the Fed into a more cautious position, which negatively impacts the dollar.

Trading Strategies

For traders using derivatives, this outlook supports strategies that benefit from a rising GBP/USD. We suggest buying call options on the British Pound with strike prices around 1.3550 or 1.3600 for late October or November expiration. This tactic enables us to take advantage of the expected upward movement while limiting potential loss to the cost of the option. Another approach is to sell out-of-the-money put options with a strike price below current support levels, possibly around 1.3400. This move generates income from the option premium and profits as long as GBP/USD remains stable or increases. Given the current uncertainty, these premiums are likely higher, providing a better return for the risk taken. We should also prepare for increased implied volatility in the weeks ahead due to the data gap. Historical government shutdowns, such as the one from 2018-2019 that lasted 35 days, saw significant market fluctuations as traders dealt with reduced information. This indicates that option prices may rise, rewarding those who get into their positions early. Create your live VT Markets account and start trading now.

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