Insights 
VT 
Pound Sterling is attempting to stabilise against the US Dollar after reaching a two-month low near 1.3280. Despite dovish remarks from Federal Reserve officials, GBP/USD remains vulnerable due to USD’s strong safe-haven demand following developments in Japan and France.
The US Dollar Index clings to gains near a two-month high of 99.56. Traders expect an 81.5% chance of the Fed cutting interest rates by 50 basis points to 3.50%-3.75% by year-end, as indicated by the CME FedWatch tool.
Fed Members Express Differing Views
Fed members express differing views: some suggest further rate cuts, while others advise caution due to persistent inflation risks. UK Chancellor Rachel Reeves is anticipated to announce tax increases in November, which concerns financial markets as it may dampen household sentiment.
The UK labour market’s latest data, released on Tuesday, will be significant in assessing economic conditions. The Pound Sterling faces technical challenges, with its decline to the 200-day Exponential Moving Average and potential support at 1.3140.
The upcoming Michigan Consumer Sentiment Index values can influence USD’s strength, reflecting consumer willingness to spend. While the survey is a reliable economic indicator, actual figures surpassing consensus generally boost the US Dollar.
Market Showing Strong Bearish Sentiment
We are seeing Pound Sterling test a critical technical level around 1.3280 against the US Dollar, which lines up with its 200-day moving average. The market is showing a strong bearish sentiment, suggesting that a breakdown below this point could trigger further selling. This makes it a crucial time to consider strategies that profit from downside moves.
The main weight on the Pound comes from expectations of tax hikes in the UK’s Autumn Statement late next month. With the UK’s debt-to-GDP ratio recently reported by the Office for National Statistics to be holding above 104%, we believe the government has little choice but to increase fiscal tightening. This prospect is dampening economic sentiment and suggests any strength in the Pound will be temporary.
On the other side, the US Dollar is strong for now, but the Federal Reserve is clearly signaling rate cuts before the end of the year. Recent US jobs data from last week showed the unemployment rate ticking up to 4.2%, giving dovish Fed members more reason to push for cuts. This conflict between short-term dollar strength and a longer-term dovish outlook creates significant uncertainty.
Given this setup, derivative traders should consider buying GBP/USD put options with expirations after the late November Autumn Statement. This provides a way to profit from a potential drop in Sterling while capping risk if the market suddenly reverses. A strike price below the 1.3200 level would offer a good risk-reward profile if the current support at 1.3280 fails.
We only need to look back to the market chaos following the UK’s “mini-budget” in 2022 to understand how sensitive the Pound is to fiscal policy surprises. That event showed how quickly currency markets can punish what they see as unsustainable fiscal plans. This history makes holding downside protection through derivatives a prudent strategy ahead of another major fiscal announcement.
In the immediate term today, the Michigan Consumer Sentiment Index will be a key focus. A weaker-than-expected number would reinforce the view that the Fed needs to cut rates soon, which could weaken the dollar and provide a temporary bounce for the GBP/USD pair. Traders could use such a bounce as a better entry point to establish bearish positions.
