Insights 
VT 
The GBP/USD exchange rate increased by 0.26% as the US government shutdown extended to its third day, causing a halt in Nonfarm Payroll figures. The ISM Services PMI in the US fell to a neutral position of 50, indicating slowing business activity and a challenging employment situation.
Central Banks Diverge
The Federal Reserve’s reliance on data has been challenged by the shutdown, complicating policy guidance. The US services PMI exceeded expectations, reaching 54.2, while the UK Services PMI dropped to a five-month low of 50.8, below forecasts.
The Federal Reserve may cut rates by 25 basis points, while the Bank of England is likely to maintain its current rates. Anticipated UK inflation could rise from 3.8% to 4% year-on-year. The British Pound showed the most strength against the Canadian Dollar this week.
We are seeing a clear divergence in central bank policy that should dictate currency movements. With UK inflation holding firm, reminiscent of the 3.8% levels we saw back in August 2023, the Bank of England is likely to keep interest rates steady. In contrast, the US Federal Reserve is signaling a potential 25 basis point rate cut amid weakening economic activity.
The ongoing US government shutdown is the main catalyst, creating a data blackout for the Federal Reserve. Without key indicators like the Nonfarm Payrolls report, policymakers are forced to rely on softer data, like the recent ISM survey, which already shows employment contracting. This lack of clear data pushes the Fed toward a more cautious and dovotic stance, which is negative for the dollar.
Trading Strategies
For derivative traders, this outlook supports strategies that profit from a rising GBP/USD. We believe buying call options on the British Pound with strike prices around 1.3550 or 1.3600 for late October or November expiry is a direct way to play this. This approach allows us to capitalize on the expected upward trend while capping our potential loss to the premium paid for the option.
An alternative strategy is to sell out-of-the-money put options with a strike price safely below current support levels, perhaps around 1.3400. This position generates income from the option premium, profiting as long as GBP/USD stays stable or moves higher. The current uncertainty means these premiums are likely inflated, offering a better return for taking on the risk.
We must also anticipate an increase in implied volatility in the coming weeks as long as the data gap persists. Looking back at past government shutdowns, like the one in 2018-2019 which lasted 35 days, market choppiness increased significantly as traders operated with less information. This suggests that option prices may become more expensive, rewarding those who position themselves early.
