The US Government Shutdown The US Dollar is facing challenges due to a lengthy government shutdown and delays in US economic data, which might limit the decline of the GBP/USD pair. The shutdown is now in its fourth week after a Senate vote of 50-43, making it one of the longest in modern history. A Reuters poll reveals that 115 out of 117 economists expect the Federal Reserve to cut interest rates by 25 basis points to a range of 3.75%-4.00% during the monetary policy announcement on October 29. Additionally, 83 economists predict two rate cuts this year, while 32 think there will be just one. The Pound Sterling, the oldest currency in the world and the official currency of the UK, is the fourth most traded currency globally. Its value is strongly affected by the Bank of England’s policies, economic data, and trade balances. Key economic indicators like GDP, PMIs, and employment figures significantly influence the Pound. A positive trade balance strengthens the currency, whereas deficits can weaken it. The GBP/USD is under downward pressure, trading near 1.3380, primarily due to the UK’s worsening fiscal situation. The government has borrowed an additional £7.2 billion in just six months, raising concerns about the Pound’s strength. Traders are now anxiously awaiting new inflation data to assess whether the situation is getting worse. Inflation Numbers and Risk Management We are noticing similarities to the high inflation period of 2022-2023 when UK CPI peaked over 11%, prompting the Bank of England to take strong action. Last month’s CPI was 4.1%, and any higher figure could lead to significant market volatility. This economic strain puts the Bank of England in a tough spot when it comes to future interest rate decisions. With uncertainty surrounding upcoming UK inflation numbers, traders might want to consider options for risk management. Buying straddles or strangles on GBP/USD can be a good strategy to profit from major price movements, regardless of direction. This enables traders to benefit from anticipated volatility without guessing whether the inflation data will positively or negatively affect the Pound. On the other side, the US Federal Reserve’s rate cut expected on October 29 is already reflected in the market. With the cut anticipated to be in the 3.75%-4.00% range, the actual decision is unlikely to shock the market. Derivatives traders should focus more on the Fed’s forward guidance and future policy commentary. The ongoing US government shutdown, now four weeks in, is adding uncertainty and limiting the dollar’s strength. Historically, events like the 35-day shutdown from 2018-2019 led to erratic price movements and weakened the dollar due to delayed economic data. This situation makes holding long dollar positions riskier ahead of the Fed meeting. The GBP/USD is caught between a financially strained UK and a politically paralyzed US, which could result in choppy, range-bound price movements. This scenario favors derivatives that profit from a defined range or sudden breakout. Selling an iron condor could work well if further consolidation is expected, while buying options is wise for capturing sharp movements after key data releases. Create your live VT Markets account and start trading now.

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