GBP/USD has reached a two-month low, with the US Dollar Index (DXY) achieving a 9-week high of 99.39. A downturn in US equities has supported the US Dollar’s momentum, pushing GBP/USD to 1.3314, a decrease of 0.67%, the pair’s lowest since August 6.

Bloomberg notes funds are positioning for extended US Dollar strength. Hedge funds are increasingly betting on continued gains for the US Dollar as European and Asian funds engage in option trades expecting the Euro and Yen to depreciate against the Dollar.

Increasing Bearish Option Trades

The Chicago Mercantile Exchange reports a notable increase in bearish option trades on the Euro vs. the Dollar, with three times more trades seen for bearish positions than bullish ones. The US government shutdown is a backdrop for the Dollar’s strengthening.

The Bank of England’s Catherine Mann reports UK inflation expectations remain high, around 4%, delaying interest rate cuts until 2026. Meanwhile, concerns loom over the upcoming UK Autumn Budget, which may focus on fiscal discipline and higher taxes, potentially impacting economic stability. Globally, the British Pound experienced the most strength against the Japanese Yen.

Given the fall in GBP/USD to 1.3314, a two-month low, the immediate strategy should focus on continued US Dollar strength. The US Dollar Index hitting a nine-week high of 99.51 signals strong momentum that we believe will persist. This view is supported by the latest Non-Farm Payroll report from last week, which showed the US added 210,000 jobs, comfortably beating the 185,000 expected and reinforcing the case for a robust American economy.

Hedge Fund Strategies and Risks

We are seeing hedge funds and institutional players ramp up bets on a stronger dollar into the end of the year. Data from the Commodity Futures Trading Commission (CFTC) shows net long positions on the US Dollar have increased for the fifth consecutive week, reaching their highest level since February 2025. The high volume of bearish option trades on the Euro further confirms this market-wide sentiment for dollar dominance.

On the other side of the pair, the Pound is facing significant headwinds from domestic issues. Bank of England official Catherine Mann’s warning about UK inflation expectations remaining near 4% has pushed back any hope of rate cuts until 2026. This is consistent with the latest inflation data from the Office for National Statistics, which pegged the UK’s Consumer Price Index at 4.1% year-over-year, keeping pressure on the central bank and weighing on economic growth prospects.

For derivative traders, this environment suggests positioning for further GBP/USD downside in the coming weeks. We should consider buying put options with strike prices below 1.3250, targeting expirations in late November or December to capitalize on the year-end dollar strength narrative. Selling GBP/USD futures contracts is another direct way to express this bearish view on the pair.

This strategy isn’t limited to just the Pound, as the dollar is strengthening broadly against G10 currencies. The data shows bearish option volumes on the Euro are three times higher than bullish ones, making EUR/USD puts an attractive trade as well. Looking at the cross-currency table, we also see the Pound’s notable strength against the Japanese Yen, suggesting a long GBP/JPY position could be a viable hedge against a sudden reversal in dollar sentiment.

However, we must remain aware of potential risks, such as the ongoing US government shutdown discussions. While the market has ignored this so far, we recall that during the prolonged shutdown that began in December 2018, the dollar’s upward momentum eventually stalled and slightly reversed. Any unexpected deal between Democrats and Republicans could cause a sharp, albeit likely temporary, pullback in the dollar.

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