Insights 
VT 
The Pound Sterling (GBP) has experienced declines against the US Dollar (USD), as the GBP/USD briefly fell below the 1.3150 level. Market dynamics were influenced by expectations of a US-China trade agreement and anticipated dovish announcements from the US Federal Reserve.
Progress on the US-China trade talks, including agreements on export controls and shipping levies, also played a role. On October 24, inflation data from the US Bureau of Labor Statistics indicated a rise in the Consumer Price Index by 0.3% in September, pushing the annual rate from 2.9% to 3%, which was softer than the 3.1% forecast.
Bearish Trend Continues
The GBP/USD pair remains low, staying near its weakest level since April 14, and suggests a continued bearish trend. Contributing to the USD’s strength is Federal Reserve Chair Jerome Powell’s recent statements dismissing expectations for an interest rate cut in December. His stance supports the USD in spite of worries related to economic risks caused by a potential prolonged US government shutdown.
Looking back, it’s interesting to see the pound trading above 1.3100, as the market dynamics have shifted considerably since then. Today, we see GBP/USD struggling to hold the 1.2450 level, showing a clear long-term downtrend. The old focus on a US-China trade deal has been replaced by persistent inflation concerns on both sides of the Atlantic.
The key driver now is the divergence in inflation data, a stark contrast to the situation years ago. The latest report from the US Bureau of Labor Statistics shows US annual inflation has cooled to 2.8%, nearing the Federal Reserve’s target. Meanwhile, data from the UK’s Office for National Statistics reveals that inflation remains stubbornly high at 3.5%, forcing the Bank of England to maintain a much stricter policy stance.
Policy Gap and Market Strategy
This policy gap is central to our strategy for the coming weeks. The Bank of England is expected to keep its base rate firm at 5.0% into the new year to combat this price pressure. In contrast, the market is now pricing in the possibility of the US Federal Reserve beginning to cut rates by the second quarter of 2026, a major shift from the hawkish tone we saw in the past.
Given this setup, we should reconsider bearish positions on the pound. The significant interest rate advantage the UK holds over the US could provide a floor for GBP/USD, limiting further downside. Derivative traders should look at buying call options to position for a potential rebound, as the pound may strengthen if the Fed signals rate cuts more explicitly.
Implied volatility for GBP/USD options has been trending lower, making them relatively cheap to purchase. This presents an opportunity to structure low-cost trades that would profit from a reversal or even a period of stabilization above the 1.2400 mark. We are considering longer-dated call spreads to capture a potential slow grind higher through the first quarter of next year.
