The Pound Sterling is stable but shows signs of weakness. Scotiabank analysts notice that short-term risk reversals indicate changing sentiment against the pound. Worries about possible tax increases and a potential rate cut by the Bank of England contribute to this uncertainty, though only a small easing of 6-7 basis points is expected. The currency pair is testing crucial support levels around 1.3140/45, which are both the lower end of the current range and significant retracement supports. While the daily chart has not yet shown a clear break below these levels, a weak weekly close could suggest higher risks of downward movement. If this happens, the pound might trade in a lower range between 1.2950 and 1.3050.

Market Insights Provided

The FXStreet Insights Team offers curated market insights, selecting observations from respected experts. These notes include input from various commercial sources and their internal or external analysts, giving a well-rounded view of the market. The Pound remains under pressure, especially at the important 1.3140 support level, as we approach the Bank of England’s interest rate decision next week. A weak weekly close could indicate a rise in the risk of a downward shift. Concerns center around potential tax hikes and the central bank’s policy direction. Recent government data shows UK GDP for the third quarter shrank by 0.1%, while inflation stubbornly stays above the target at 3.1%. Given this context, it might be wise to consider buying GBP/USD put options to prepare for a potential drop. Focusing on the 1.3140 level, put options with a strike price around 1.3100, expiring in late November or December, look attractive. If the support level is breached, this strategy could help us profit from a decline toward the 1.2950 range, allowing time for the trade to develop after the Bank’s announcement on November 6th.

Strategy for Managing Implied Volatility

Implied volatility is rising ahead of the meeting, making options pricier but also signaling expectations of significant price movement. To handle the increased premium costs, a bearish put spread might be a better choice than buying outright puts. This strategy involves purchasing the 1.3100 put while selling a lower strike put, such as the 1.2950 put. We know that sentiment around the Pound can change quickly, especially considering the fiscal policy fluctuations from 2022. Currently, with the market only anticipating a minimal 6-7 basis point cut, there is potential for a surprise that could push the downward trend. Implementing a defined-risk options strategy appears to be a smart move for this scenario. Create your live VT Markets account and start trading now.

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