Insights 
VT 
Speculation of Interest Rate Cuts
The Pound Sterling gained against its major peers following the UK’s release of GDP and industrial data for August. The GDP increased by 0.1%, aligning with expectations, while Industrial Production rose by 0.4% from a 0.4% decline in July, surpassing the anticipated 0.2% increase.
Manufacturing Production grew by 0.7% in August, up from a 1.1% decline in July, outperforming the forecast of 0.4%. These improvements offer the UK government a reprieve as it prepares the upcoming Autumn Budget, potentially involving tax hikes to cover routine expenditures.
Speculation of additional interest rate cuts from the Bank of England has risen amid growing job market concerns. The unemployment rate climbed to 4.8% for August, while the Bank of England forecasts inflation pressures to peak at around 4% in September.
The Pound Sterling strengthened against the US Dollar to near 1.3440 post-GDP release. The US Dollar, affected by Federal Reserve dovish bets and US-China trade tensions, trades near a weekly low, with a 94.6% expectation for a further rate cut by the Fed this year.
The GBP/USD pair remains volatile, hovering around the 20-day Exponential Moving Average near 1.3419. Support and resistance levels for this pair are seen at 1.3140 and 1.3500, respectively.
The UK economy showing 0.1% growth for August provides a brief lift for the Pound, especially with manufacturing numbers looking stronger than expected. This explains the currency’s outperformance today, but we should not get carried away by this single data point. The underlying trend remains weak, suggesting this strength may be a short-lived opportunity.
We must remember the broader context of the UK’s economic performance. The economy was largely stagnant throughout 2024, narrowly avoiding a technical recession, so this small tick upwards is from a very low base. With the ILO unemployment rate now at 4.8%, a level not consistently seen in the post-pandemic recovery, the labour market is clearly softening.
Monetary Policy Divergence
The focus should now be on monetary policy divergence, which is likely to drive currency markets. The Bank of England is widely expected to cut interest rates again this year to support the flagging economy. This is a significant shift from the high-rate environment the central bank maintained through much of 2024 to combat inflation, which peaked above 10% back in 2022.
On the other side of the Atlantic, the US Dollar is also under pressure, with markets pricing in a 94.6% chance the Federal Reserve will cut its own rates significantly. This broad dollar weakness is currently propping up the GBP/USD pair, but we cannot rely on it to last. Any change in the Fed’s stance could remove this crucial support for the Pound.
Given these conflicting signals, we expect increased volatility in the Pound over the coming weeks. This suggests traders could use options strategies, such as buying straddles or strangles on GBP/USD, to profit from a significant price move in either direction, especially around the Autumn Budget announcement next month. This approach capitalises on the uncertainty without betting on a specific direction.
For traders with a directional bias, the fundamental outlook appears bearish for Sterling beyond the immediate short term. The combination of expected tax hikes in the budget and further interest rate cuts from the Bank of England creates significant headwinds. Buying put options on the Pound could be a prudent strategy to position for a potential slide back towards the 1.3140 support level seen in August.
