The GBP/USD trades positively, reaching around 1.3365 in Tuesday’s European session. Strengthening is attributed to improved UK Retail Sales and S&P Global PMI data, coupled with expectations of a Federal Reserve rate cut.

The pair’s movement is influenced by a weakening US Dollar, driven by anticipated interest rate cuts by the Federal Reserve. Recent lower-than-expected US CPI inflation data have increased the likelihood of a rate cut, impacting the Greenback’s value.

The Federal Reserve Rate Decision

The Federal Reserve is anticipated to lower its key interest rate by 25 basis points at the upcoming October meeting. Traders have priced in a 97% probability of the rate falling to 3.75%-4.00%, marking a potential consecutive rate cut.

UK economic conditions, such as Retail Sales and PMI data, support the Pound against the Dollar. The Bank of England will announce its next interest rate decision in November, with differing opinions on the potential for a rate cut.

Economists suggest the BoE may wait for the Chancellor’s Autumn Budget to assess its impact on inflation. The UK’s fiscal uncertainty and potential growth challenges could negatively affect the GBP.

US Dollar Expectation

We see the US Dollar weakening ahead of the Federal Reserve’s decision tomorrow, with a rate cut of 25 basis points almost fully priced in. The latest US CPI data for September showed inflation cooling to 3.1%, giving the Fed justification for what would be its second consecutive rate reduction after the cut in September 2025. This expectation is the primary factor providing strength to the GBP/USD pair.

On the Sterling side of the equation, momentum is supported by solid domestic data that surprised to the upside. We saw September retail sales, released last Friday, rise by a healthy 0.6%, and the flash Composite PMI for October climbed to 51.5, indicating continued economic expansion. This resilience complicates the Bank of England’s interest rate decision, which is scheduled for next week.

For derivative traders, the immediate setup suggests focusing on short-dated call options on GBP/USD to capitalize on the expected US Dollar weakness following the Fed meeting. With the rate cut largely anticipated, implied volatility for this week is not excessively high, making options an attractive strategy to express a directional view. The key will be the Fed’s forward guidance, as a more dovish tone could extend the rally.

Looking into November, we see significant event risk that could cap Sterling’s gains, namely the Bank of England meeting on November 6 and the Autumn Budget on November 26. The BoE may signal a ‘wait-and-see’ approach ahead of the budget, which could stall the pound’s upward momentum. This suggests that selling out-of-the-money call options with expirations in late November could be a viable strategy, betting that the pair struggles to break significantly higher.

We must also consider that this climb towards 1.3400 is testing levels not seen with any consistency since the first half of 2022. While the Fed’s policy pivot is the current catalyst, any sustained strength will depend heavily on the UK’s upcoming fiscal and monetary policy clarity. Any disappointment from the UK side could trigger a sharp reversal from these multi-year highs.

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