GBP/USD experienced a slight bounce from the 1.3300 level, achieving its first upward movement in six trading sessions. However, the Federal Reserve’s approaching interest rate decision is expected to maintain current trends, with a probable quarter-point rate cut anticipated on Wednesday.

The currency pair remains under pressure, still below the 50-day EMA at 1.3428, while finding support near the 200-day EMA at 1.3278. Despite a minor rebound from the previous week’s low of 1.3250, the longer-term downward trend persists, with momentum indicators like RSI hovering around 43, suggesting stagnation.

Pound Sterling Background

The Pound Sterling, known as GBP, is the world’s oldest currency and ranks fourth in global foreign exchange trading, accounting for 12% of transactions. The Bank of England’s monetary policy, especially interest rate adjustments, plays a central role in influencing the currency’s value, aiming for a 2% inflation rate.

Various data releases, such as GDP and employment figures, impact GBP’s strength. A positive Trade Balance strengthens the Pound by increasing demand from international buyers for British exports. Conversely, negative economic data or a Trade Balance deficit could lead to currency depreciation.

We’ve seen GBP/USD struggle to find direction, consolidating around the 1.2450 mark. A recent test of the 50-day Exponential Moving Average (EMA) at 1.2510 was quickly rejected, showing sellers are still in control of any rallies. This price action keeps the pair in a tight range, much like the choppy periods we saw back in 2019 before the Fed’s cutting cycle began in earnest.

The key focus now is the growing divergence between the Bank of England (BoE) and the Federal Reserve. With UK inflation recently reported at 2.5% and third-quarter GDP showing a minor contraction of 0.1%, pressure is mounting on the BoE to consider rate cuts before year-end. In contrast, the US economy remains more resilient, giving the Fed room to hold interest rates higher for longer.

Strategies for Derivative Traders

For derivative traders, this policy uncertainty suggests buying volatility might be a prudent strategy. Options straddles or strangles could benefit from a significant breakout, which could be triggered by the upcoming BoE meeting in November. The current implied volatility for GBP/USD is sitting at a relatively low 6.8% for 3-month options, which may not fully price in the risk of a dovish BoE.

We are watching key technical levels, with immediate support near 1.2380, the low from early October. A decisive break below this could open up a path towards the 1.2250 handle, a level not seen since the economic jitters of mid-2024. Momentum indicators are bearish but not yet oversold, suggesting there is still room for further downside.

Any recovery will likely face stiff resistance around the 1.2510 area, where the 50-day EMA converges with prior support. To shift the current bearish outlook, we would need to see a sustained move above 1.2600. Such a rally would likely require a surprisingly weak US jobs report or a hawkish pivot from the BoE, neither of which is our base case.

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