Insights 
VT 
The Pound Sterling is struggling near 1.3400 against the US Dollar during a late European trading session. The pair experiences selling pressure as the US Dollar gains strength, despite a government shutdown in the United States continuing into its second week.
The US Dollar Index, which measures the Greenback against six major currencies, is trading 0.35% higher, nearing 99.00, marking a two-month high. The GBP/USD pair has dipped below mid-1.3400s due to renewed supply, with the US Dollar attracting fresh buyers.
Impact of Domestic Political Strains
This US Dollar strength results from a weaker Japanese Yen and Euro under domestic political strains. Japan’s leadership contest outcome suggests more fiscal policies and has led to adjusted interest rate expectations by the Bank of Japan, weakening the Yen.
In Europe, France’s Prime Minister Sebastien Lecornu’s resignation amid political backlash impacts the Euro, while bolstering the US Dollar. Meanwhile, the broader cryptocurrency market is recovering slowly, and Solana trades over $220, though on-chain activity is limited.
The US dollar is showing surprising strength, even as the government shutdown enters its second week. This is putting significant pressure on the pound sterling, pushing the GBP/USD pair toward the 1.3400 mark. We see this as a sign that traders are currently favoring the dollar over its major peers.
This situation feels similar to the 16-day shutdown we saw back in October 2013, which delayed key economic data and created uncertainty. As of today, the shutdown has halted reports from the Bureau of Labor Statistics, leaving us without fresh jobs data to guide our decisions. This lack of information tends to make the dollar a safe haven, as traders flock to liquidity amid the confusion.
Domestic Factors Affecting the Pound
The pound’s weakness is also being driven by domestic factors, with the latest UK inflation report from late September coming in at 3.1%, slightly below market expectations. This gives the Bank of England less reason to pursue aggressive interest rate hikes compared to the US Federal Reserve. This policy divergence is a key factor weighing on the GBP/USD exchange rate.
Given this backdrop, we think positioning for further downside in GBP/USD through derivatives is a sensible approach for the coming weeks. Buying put options with strike prices around 1.3350 and 1.3300 could provide a way to profit from a continued slide while clearly defining risk. We have seen 1-month implied volatility for the pair rise from 8.5% to 9.2% over the last week, showing the market is bracing for bigger moves.
The main event to watch will be the release of the Federal Open Market Committee (FOMC) minutes. While the CME FedWatch Tool is pricing in a 74% chance of another Fed rate hike by December, any hint of caution from policymakers due to the shutdown could cause a sharp reversal. Traders should therefore be prepared for the dollar’s rally to stall if the minutes sound more dovish than anticipated.
