The GBP/USD pair is currently above 1.3300, thanks to the cautious approach of the Bank of England (BoE). BoE member Catherine Mann has pointed out that the bank will maintain a strict monetary policy due to ongoing inflation and slow growth.

UK Government’s Economic Strategy

The UK government wants to control wages by avoiding emergency funds for pay raises, arguing that this will help stabilize the economy. However, the GBP/USD may weaken if the US government shutdown affects the US Dollar. In the US, the Federal Reserve’s stance is more relaxed. Fed President Mary Daly mentioned that inflation is lower than expected. Fed Governor Michael Barr noted the difficulties in assessing policy, especially regarding the impacts of the shutdown. The Pound Sterling is the oldest currency globally and makes up 12% of all foreign exchange transactions. The BoE primarily influences its value by changing interest rates to keep prices steady. Economic data like GDP and trade balance also plays a role in the GBP’s value. Trade balance data affects the Pound. A positive trade balance can strengthen the currency as strong exports draw in foreign investment. On the other hand, a negative trade balance can weaken it as it reduces foreign demand.

Central Bank Policies and Their Impact

The Pound is holding strong against the Dollar, backed by the BoE’s firm policy. The BoE has indicated that interest rates, currently at 5.00%, must remain high to tackle persistent inflation. Recent inflation data from September 2025 showed the UK Consumer Price Index (CPI) at 3.1%, well above the 2% goal. This is a stark contrast to the US situation, where the Federal Reserve is taking a softer approach. With US inflation dropping to 2.5% last month and the September jobs report revealing weaker hiring, the Fed has already lowered rates. This interest rate gap between the UK and the US is putting upward pressure on the GBP/USD pair. However, the ongoing US government shutdown, now on its tenth day, brings uncertainty. The 35-day shutdown from 2018-2019 showed that prolonged political stalemates can lead to a flight to safety, boosting the US Dollar regardless of the Fed’s actions. If the situation in Washington worsens, the GBP/USD could easily dip below the 1.3300 mark. For traders in derivatives, this creates a classic tension between economic fundamentals and political risk. The clear differences in monetary policy suggest buying GBP/USD call options could be beneficial, aiming to leverage the interest rate advantage. This viewpoint is supported by the pair’s resilience, which hasn’t seen these levels since early 2024. Nonetheless, due to the shutdown risks, implied volatility might rise over the coming weeks. Using a long straddle or strangle options strategy on GBP/USD could be a smart move for trading this uncertainty. This strategy would benefit from significant price movements in either direction, whether from a rally driven by the BoE or a significant drop due to a US-led risk-off event. Create your live VT Markets account and start trading now.

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