Insights 
VT 
S&P Global PMI Data
Despite positive UK indicators, GBP struggles to gain momentum, as expectations of a Bank of England rate cut linger. The swaps market indicates a 25% chance of a November rate cut. In contrast, US inflation data was softer, with CPI rising 0.3% in September, supporting Federal Reserve rate-cut expectations.
US S&P Global PMI data showed robust private sector activity, with Composite PMI at 54.8, aiding USD recovery. GBP/USD remained nearly unchanged, with British Pound showing significant strength against the Canadian Dollar.
The British economy is showing surprising strength, with both retail sales and business activity beating expectations. This creates a difficult situation, as the Bank of England is still expected to cut interest rates. This tug-of-war between strong data and rate cut expectations is keeping GBP/USD pinned around the 1.3325 level.
Market Expectations
We see the market pricing in 50 basis points of BoE rate cuts over the next year, but we should be cautious. Looking back, UK inflation was very stubborn throughout 2024, and the BoE may be hesitant to cut rates too quickly despite the recent drop to 3%. Traders could consider options that profit if the Bank of England holds rates steady at its November meeting, which would go against current market odds.
On the other side of the pair, softer US inflation data supports the case for Federal Reserve rate cuts, a trend we first saw emerge back in late 2023 when the Fed began signaling its policy pivot. However, strong US business activity, with the Composite PMI rising to 54.8, is keeping the US Dollar supported for now. This stalemate between the two economies is containing the currency pair in a narrow range.
With conflicting data from both sides, GBP/USD is likely to remain range-bound in the short term. One-month implied volatility for the pair has recently fallen to 6.8%, which is low compared to the levels we saw throughout most of 2024. This suggests that now could be an opportune time to buy long-dated options, such as straddles, to position for a breakout.
The main events to watch are the upcoming central bank meetings in early November. Any surprise from either the Bank of England or the Federal Reserve could easily break the current deadlock. Therefore, we believe the best approach is to trade the coming volatility itself, rather than betting on a specific direction for the pound.
