The GBP/USD is stabilising around 1.3200 after recent declines triggered by the Federal Reserve’s interest rate cut of 25 basis points. Despite the expected cut, Fed Chair Powell’s comments on the uncertainty of further easing have strengthened the US dollar, putting pressure on the pound.

The UK currency also faces challenges at home, with the possibility of a Bank of England rate cut and concerns about the November budget affecting market sentiment. Prime Minister Keir Starmer has not ruled out tax increases, adding to economic uncertainty.

Key Technical and Market Challenges

The GBP/USD pair dropped to a three-month low after failing to maintain gains, and the 200-day moving average of 1.3239 was breached. The next key level is 1.3141, representing a crucial support point.

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Given the sharp sell-off in the pound, we see the US dollar strengthening on the back of a cautious Federal Reserve. The break below the key 200-day moving average at 1.3239 is a significant bearish signal. This suggests that any small bounces in GBP/USD are likely to be sold into, as the path of least resistance appears to be lower.

Market Dynamics and Future Outlook

The expectation for a Bank of England rate cut is now firmly priced in, especially after the latest UK inflation data for September 2025 showed a drop to 2.1%, missing forecasts. Adding to this, last week’s retail sales figures showed a surprise 0.5% contraction, pointing to a weakening consumer ahead of the crucial holiday season. This economic softness makes it very difficult for the Bank of England to hold rates steady.

In contrast, the US economy continues to show resilience, justifying the Fed’s reluctance to promise more cuts. The last non-farm payrolls report for September 2025 revealed a robust 250,000 jobs were added, and core inflation remains sticky at 2.8%. This divergence between a slowing UK and a steady US economy should continue to fuel the dollar’s strength against the pound.

For derivative traders, this environment suggests buying GBP/USD put options to profit from further downside may be a prudent strategy. With the November UK budget on the horizon and uncertainty over potential tax rises, implied volatility is increasing, making options an effective tool to manage risk. This allows for exposure to a potential drop towards the 1.3141 support level while capping the maximum loss.

We’ve seen this script before when political uncertainty weighs on the pound, much like the market reaction to the mini-budget crisis back in September 2022. The refusal by the Prime Minister to rule out tax hikes is creating a similar sense of unease among investors. This historical precedent suggests that fiscal policy concerns can cause sharp, extended declines in Sterling.

With the 1.3200 level now acting as a ceiling, we are watching the August 1 low of 1.3141 as the next logical target for bears. A decisive break below this level would open the door for a deeper move towards the psychological 1.3000 handle. The technical picture and the fundamental backdrop are now clearly aligned against the pound in the coming weeks.

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