The Pound Sterling increased against the US Dollar, trading close to 1.3440. The UK’s GDP grew by 0.1% in August, with Industrial Production up by 0.4% and Manufacturing Production up by 0.7%. The US Dollar Index is at a weekly low of 98.40 due to expectations of interest rate cuts by the Federal Reserve (Fed). There is a 94.6% chance the Fed will lower rates by 50 basis points to a range of 3.50%-3.75% this year. Fed Governor Michelle Bowman supports two more cuts, citing risks in the labor market.

Tensions Between the US and China

Tensions between the US and China continue. President Trump is trying to stop China from buying oil from Russia and has threatened higher tariffs. However, there is hope for resolution after a meeting with China’s leader. The UK’s economy shows signs of recovery, with slight GDP growth offering temporary relief, although tax increases are expected in the Autumn Budget. The Bank of England may lower rates due to concerns about the job market. The ILO Unemployment Rate has risen to 4.8%, and inflation is expected to peak around 4% by September. The GBP/USD pair remains uncertain, hovering near the 20-day Exponential Moving Average, with support at 1.3140 and resistance at 1.3500. Looking back to late 2024, the pound was gaining against the dollar, but now the situation has changed. On October 16, 2025, GBP/USD is trading closer to 1.2850 as confidence in the US economy recovers, leading to a stark difference from the UK’s outlook. This presents a good opportunity for traders expecting further dollar strength against the pound. The Federal Reserve’s rate cuts that were discussed have occurred through early 2025, and the US economy has shown resilience. The September Non-Farm Payrolls report added 210,000 jobs, far exceeding expectations. As a result, the CME FedWatch tool now shows only a 15% chance of another rate cut this year, a big change from the earlier 94.6% certainty.

UK Economy Struggling with Tax Hikes

In contrast, the UK economy is facing challenges from tax hikes made in the Autumn Budget of 2024. Recent figures show Q3 2025 GDP was flat, and while unemployment dropped to 4.2%, inflation remains stubbornly at 3.1%. This situation puts the Bank of England in a tough spot, and the stagnation is affecting the pound’s value. The difference in monetary policy now reminds us of the 2014-2016 period when the Federal Reserve hinted at tightening policies while other banks stayed relaxed, creating a long dollar bull run. Similar factors are emerging now, which usually supports a sustained trend in currency markets. Considering this situation, traders should explore strategies that would benefit from declines in the GBP/USD pair. Buying put options with strike prices below 1.2800 could be a way to speculate on further downside while managing risk. These options would profit if the pound continues to drop towards significant support around 1.2700 in the upcoming weeks. Create your live VT Markets account and start trading now.

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