The Pound Sterling strengthens against the US Dollar, reaching near 1.3440 following the UK’s GDP release. The UK economy’s growth, showing a 0.1% increase in August, contributes to this rise while the US Dollar remains weak.

Recently, GBP/USD rebounded back to 1.3400 after slipping near the 200-day Exponential Moving Average at around 1.3290. The US government’s ongoing shutdown has affected the flow of American economic data, while multiple UK economic releases are awaited.

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The Pound Sterling is showing strength against a weakening US Dollar, climbing back above the 1.3400 mark. This move is driven less by the UK’s modest 0.1% GDP growth and more by bets that the US Federal Reserve will cut rates. The ongoing US government shutdown is amplifying this dollar weakness by halting key economic data releases, creating uncertainty.

US Inflation Trends

We see this as a continuation of the trend where US inflation, which peaked back in 2022 at over 9%, has finally cooled enough for the Fed to consider easing policy. This contrasts with the UK’s situation, where economic data has consistently shown sluggish growth, similar to the near-stagnation we saw through much of 2024. Therefore, this currency pair’s movement is primarily a US story, not one of overwhelming Sterling strength.

In the coming weeks, we should consider positioning for further upside in GBP/USD, perhaps towards the 1.3500 level. Buying call options with strike prices around 1.3450 could offer a way to capitalize on this momentum with defined risk. The premium on these options is likely elevated due to uncertainty, but the dollar’s weakness provides a clear fundamental driver for now.

However, the situation is fragile, as US government shutdowns, like the one we saw in 2018, historically end abruptly. A sudden resolution could trigger a sharp reversal, so purchasing protective put options below the recent 1.3290 support level is a prudent way to hedge long positions. This strategy protects against a sudden snap-back in the dollar once data flow resumes.

The current environment makes trading volatility itself an interesting play. Implied volatility in GBP/USD options has likely increased, reflecting the uncertainty from the US data blackout. Selling out-of-the-money puts could be a way to collect premium, betting that the pair will not collapse while the dollar remains under pressure from rate cut expectations.

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