Insights 
VT 
The Pound Sterling has weakened slightly against the US Dollar, reaching near 1.3340, as attention turns to US inflation data. This occurs amidst increasing forecasts for the Bank of England to cut interest rates further.
A 78% likelihood is now priced in for a 25bps rate cut by the BoE, up from 46% earlier in the week. This comes after UK September CPI data indicated inflation peaking, with core CPI at 3.5% compared to 3.6% in August.
UK Gilt Yields
Short-term UK gilt yields have decreased, with 10-year yields at their lowest in 10 months, now at 4.37%. Concurrently, the US is set to announce restrictions on software exports to China, which might include a broad range of goods.
The US Dollar Index is slightly up by 0.2% as it trades near 99.10, with the upcoming US CPI data anticipated to show a year-on-year rise to 3.1%. Traders expect the Federal Reserve to also reduce interest rates by 25bps in its final two meetings of the year.
Globally, the US’s export restriction plans to China might affect a variety of software-powered goods. The British Pound has shown varied performance against major currencies, being strongest against the Japanese Yen.
Given the Pound is weakening against the Dollar, we need to focus on the divergence between the Bank of England (BoE) and the US Federal Reserve. The BoE appears ready to cut interest rates, possibly as soon as December, as UK inflation shows signs of peaking. This dovish stance is putting downward pressure on Sterling.
Market expectations are now pricing in a high probability of a BoE rate cut to 3.75% before the end of the year. The latest UK inflation figures support this view, with core inflation slowing to 3.5% in September. This is a noticeable shift, especially when we recall the persistent inflation concerns that dominated throughout 2024.
In contrast, the United States is facing a potential reacceleration of inflation, with the upcoming CPI report for September expected to show a rise to 3.1%. A higher-than-expected number would challenge the market’s aggressive pricing for two Fed rate cuts this year. This makes tomorrow’s US CPI release the most critical event for the GBP/USD pair in the near term.
US Dollar Opportunity
This policy split is creating a clear opportunity to position for further US Dollar strength against the Pound. A US inflation reading above the 3.1% consensus would likely drive the GBP/USD pair lower. Derivative traders could consider buying put options on the Pound to hedge or speculate on a drop below the 1.3300 level.
The bond market is confirming this outlook, with 10-year UK gilt yields falling to a 10-month low of 4.37%, reflecting the BoE’s dovish pivot. We should watch for a spike in US Treasury yields following the CPI data to confirm this divergence. The last time we saw such a clear policy split was back in late 2023, which resulted in significant Dollar outperformance.
Adding to the Dollar’s appeal is the renewal of trade tensions with China. The US plan to restrict software-powered exports from November 1st is a significant escalation from the semiconductor restrictions we saw implemented over the past few years. This uncertainty typically boosts demand for the US Dollar as a safe-haven currency.
From a technical standpoint, the GBP/USD pair remains vulnerable below its 20-day moving average around 1.3404. A decisive break below the 1.3300 psychological level could open the door for a move towards the August low of 1.3140. Any short-term rallies towards 1.3400 might be seen as selling opportunities.
