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The US Dollar Index Holds Steady
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Given the current weakness in the Pound Sterling, which we see has hit a two-month low near 1.3280, the immediate outlook is tilted downwards. The US Dollar’s strength, with the DXY holding near a high of 99.56, is being driven by a flight to safety amid political uncertainty in France and Japan. This safe-haven demand is currently outweighing market expectations of future US interest rate cuts.
The Pressure on the Pound
The pressure on the pound appears to stem from growing UK fiscal concerns, a sentiment that has taken hold following the government’s budget announcements in late September 2025. The UK’s Office for Budget Responsibility has recently revised its Q4 growth forecast down to just 0.1%, while the latest inflation data from last month remains stubbornly high at 3.5%. This creates a challenging environment for the Bank of England and weighs heavily on the currency.
Interestingly, the US Dollar is showing this strength even as the CME FedWatch tool indicates an 80% probability of a significant rate cut by December 2025. This tells us that global risk aversion is the dominant market driver, a factor that is unlikely to fade in the immediate term. We saw a similar dynamic during the global banking stress in early 2023, where the dollar strengthened despite a shifting Fed outlook.
We have seen this sort of playbook before when fiscal worries dominate the UK market. The sharp sell-off in the pound following the “mini-budget” announcement back in the autumn of 2022 is a clear historical precedent. That event showed how quickly international capital can flee the UK when confidence in its fiscal policy is shaken.
For derivative traders, this situation points towards positioning for further potential downside in GBP/USD. The rising premium for protection against sterling weakness, as noted in the 3-month risk reversals, suggests that buying put options is the most direct strategy. Traders should look at contracts expiring in November and December 2025 to capture this ongoing momentum.
Given that the cost of these options is rising, a more cost-effective approach could involve using put spreads. A bear put spread, for instance, would allow a trader to target a specific downward move while capping both the potential profit and the upfront cost. This strategy is well-suited for a market where implied volatility is increasing but a complete collapse is not the base case.
