The Pound Sterling rose by 0.5% to about 1.3280 against the US Dollar on Wednesday during the European trading session. This increase is due to selling pressure on the US Dollar, as there are speculations about possible leadership changes at the Federal Reserve. On Tuesday, the GBP/USD pair stayed near the 1.3200 level as traders awaited potential interest rate cuts from both the Federal Reserve and the Bank of England by late 2025.

Dollar Weakness Expected

In the early European session on Wednesday, the GBP/USD pair climbed to 1.3235. The US Dollar remained weak against the Pound Sterling, supported by expectations of a 25 basis points rate cut by the Federal Reserve at its next meeting. With pressure on the US Dollar, the outlook for the coming weeks looks promising. The CME FedWatch Tool shows a 92% chance of a 25 basis point cut by the Fed next week, a shift prompted by the US Core CPI falling to 2.8% last month. This reinforces the expectation of differing policies between the Fed and other central banks. For those betting on further strength in GBP/USD, buying call options with strike prices above 1.3300 presents an appealing risk-to-reward profile. This strategy allows us to benefit from expected dollar weakness while limiting our potential loss to the premium paid. It is also a more efficient way to invest compared to holding a direct long position.

Volatility Factors

We should also pay attention to the increasing volatility, as the CVIX for sterling-dollar has risen ahead of the central bank meetings. This indicates that traders might consider straddles or strangles if they expect significant price movements but are unsure about the direction. These strategies can yield profits from a sharp change, regardless of whether the Fed’s decision surprises the market. However, we must keep in mind that UK inflation remains stubbornly high at 3.5%. This could affect the Bank of England’s willingness to follow the Fed’s actions. It echoes the situation in mid-2019, where Fed easing caused dollar weakness, but gains in other currencies were limited by domestic concerns. Therefore, selling out-of-the-money puts could be a strategy to earn premiums while betting that any downside is limited for now. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now