The Pound Sterling has dropped to its lowest level in almost three months, trading at around 1.3200 against the US Dollar. Investors are eagerly waiting for the Federal Reserve’s decision, which is expected to lower interest rates by 25 basis points to 3.75%-4.00%. UK Chancellor Rachel Reeves may implement higher taxes on households and reduce spending in the upcoming budget. Reports indicate that the Labour Party is planning a fiscal cut of about £30-35 billion. This may include raising the dividend tax rate and introducing new taxes on sugar and gambling.

US Dollar Index Rises

The US Dollar Index has increased by 0.2%, approaching 99.00. The market anticipates that the Fed will keep cutting interest rates and could make another reduction in December due to a weak job market and decreasing inflation. Goldman Sachs forecasts that the Bank of England will lower rates to 3.75%, although some expect cuts to happen in 2026. The Pound Sterling has weakened against all major currencies, particularly struggling against the Australian Dollar. From a technical standpoint, the GBP/USD pair has become bearish, dropping below the 200-day Exponential Moving Average, and the 14-day Relative Strength Index has fallen below 40.00. Key support is seen at 1.3140, with resistance at 1.3500. The Federal Reserve is almost certain to cut interest rates by 25 basis points today. Since this move is already expected, the focus will be on the Fed’s guidance for future policies. The weak September jobs report, showing only 95,000 new jobs, gives the Fed enough reason to hint at more cuts.

Trading Opportunities

The real trading opportunity lies not in the rate cut itself but in the potential surprise in the Fed’s messaging. Using options, like straddles on the US Dollar Index, could be a smart way to benefit from market volatility. This strategy allows traders to profit from significant price movements in either direction. The Pound Sterling appears weak against the US Dollar, and we anticipate this trend will continue in the coming weeks. Fears that the UK government will raise taxes on consumers are heavily impacting the currency. These concerns are valid, especially after the Office for Budget Responsibility reduced its 2026 growth outlook to just 0.8%, due to slow investment. Given this bearish outlook, buying put options on the GBP/USD pair could be a good opportunity. This approach provides downside protection while limiting risk to the premium paid for the option. With the pair trading below its 200-day moving average, technical analysis supports a decline towards the August low of 1.3140. The essence of our strategy lies in the differing paths of the Federal Reserve and the Bank of England. The Fed is actively cutting rates, while the Bank of England’s next move remains uncertain, giving an advantage to the US Dollar. We observed a similar situation in late 2021 when the Fed’s aggressive rate increases boosted the dollar against other currencies. Create your live VT Markets account and start trading now.

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