The Pound Sterling fell after disappointing UK Q3 GDP data, which showed just 0.1% growth instead of the expected 0.2%. Furthermore, the unemployment rate rose to 5%, the highest level since February 2021, raising more economic worries. With signs of slowing growth and decreasing manufacturing activity, market speculation increased that the Bank of England might cut interest rates. In September, the UK economy shrank by 0.1%, against predictions of no change, with manufacturing and industrial production declining by 1.7% and 2%, respectively.

Currency Market Reactions

In the currency market, the Pound was weakest against the Australian Dollar while GBP/USD bounced back to around 1.3165 during European trading. The US Dollar Index dropped to about 99.15, as 80% of economists surveyed by Reuters expect another interest rate cut from the Federal Reserve. Currently, GBP/USD trades below the 200-day EMA, suggesting a bearish trend. Politically, US President Trump signed a bill to reopen the government after the longest shutdown in history, lasting 43 days. This situation emphasizes the link between GDP growth and currency value. The latest UK data is concerning for the Pound Sterling. With Q3 GDP growth just 0.1% and unemployment rising to 5%, pressure is on the Bank of England. This raises the likelihood of a rate cut in December. This perspective is reinforced by last week’s October inflation report, which showed a drop in CPI to 2.1%, falling short of expectations and reducing pressure on the Bank of England to keep rates high. Additionally, October retail sales contracted by 0.5%, indicating a weakening consumer. These signs point to an ongoing economic downturn as we enter the fourth quarter.

Weakness of the Sterling

Given these signs of weakness, we should consider preparing for further declines in the Pound in the coming weeks. Strategies such as buying GBP puts or setting up put spreads can effectively manage risk while anticipating a drop. We foresee particular weakness against currencies with stronger central bank positions, like the Australian Dollar, which has recently outperformed the Pound. We have seen similar situations before. After the 2016 Brexit vote, the Bank of England’s shift toward easing led to a long period of Sterling underperformance. This historical context supports the idea that a confirmed dovish stance from the Bank of England could continue to weigh on the Pound into early 2026. The situation with the US Dollar adds another layer of complexity, as the Federal Reserve is also hinting at a rate cut for December. The recent end of the 43-day government shutdown hasn’t changed the Fed’s dovish comments, and jobless claims have recently increased to 245,000. This suggests that while we expect the Pound to decline, any drop in GBP/USD might be cushioned by weakness in the Dollar as well. Political uncertainties surrounding the Prime Minister before the Autumn Budget present additional risks that could increase volatility. Any signs of instability could lead to rising gilt yields and more pressure on the Pound, regardless of central bank actions. Therefore, traders should brace for sharp movements and consider using options to navigate this potential volatility. Create your live VT Markets account and start trading now.

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