The Pound Sterling has risen to nearly 1.3500 against the US Dollar due to a slowdown in the US job market. The US Dollar Index is at a weekly low around 97.50 after the private sector lost 32,000 jobs, which was much worse than the expected gain of 50,000.

Federal Reserve Likely to Lower Interest Rates

The weakening US job market increases the chances of the Federal Reserve cutting interest rates. At their next meeting, the Fed is expected to lower rates by 25 basis points to a range of 3.75%-4.00%. Bank of England Deputy Governor Sarah Breeden has expressed worries that a tight monetary policy could push UK inflation below the 2% target. The expected Consumer Price Index (CPI) inflation from UK firms has slightly risen to 3.5% for the quarter ending in September. With a possible US government shutdown looming, the White House warns of potential mass layoffs. Moreover, the US Department of Labor may not provide Initial Jobless Claims data during the shutdown. The Pound has been gaining against the Dollar for five consecutive days. The GBP/USD pair aims to hold above the 20-day Exponential Moving Average of about 1.3485, with clear support and resistance levels in place.

Expectations for Interest Rate Cuts

The Pound Sterling is gaining on the US Dollar, moving closer to 1.3500, as the American job market slows, making the Dollar less appealing. The impending US government shutdown may worsen job conditions in the upcoming weeks. Recent data confirms this trend. The September Non-Farm Payrolls report showed just 45,000 new jobs, far below the expected 150,000. This continues a weak trend seen in the earlier ADP private payrolls data. As a result of this weak data, traders now believe there is a 95% chance the Federal Reserve will cut interest rates by 25 basis points in its upcoming meeting. This expectation of lower rates is putting pressure on the Dollar. Meanwhile, Bank of England officials, including Sarah Breeden, are concerned about waiting too long to lower UK rates. Their comments suggest the BoE may also consider cuts in the future, which introduces uncertainty and could limit the Pound’s rise. Given the current situation, buying GBP/USD call options to benefit from upward movement is a good strategy. However, a bull call spread might be a smarter move, allowing profits if the price rises to around 1.3700 while minimizing risks if the BoE’s cautious stance affects the Pound. The US government shutdown is creating unease in the markets, pushing one-month implied volatility for GBP/USD up to 9.5%. This increased volatility makes it more appealing to sell higher-strike calls in a spread, preparing us for larger price swings based on news from Washington. This situation resembles the market volatility we saw during US political standoffs in 2023. Back then, we learned that while economic trends are important, news can cause sudden price changes. Therefore, using defined-risk strategies like spreads is wise. Currently, GBP/USD is trying to stay above the 20-day moving average of about 1.3485, which is a positive sign for the trend. A successful rise above this level could target the September high of 1.3726, making it an important goal for any bullish strategies established now. Looking ahead, inflation reports from both the US and the UK will be crucial. These CPI figures will influence whether the Fed or the BoE take significant action on interest rates. Traders should keep a close eye on this data, as it could change market sentiment quickly. Create your live VT Markets account and start trading now.

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