Insights 
VT 
The US Government Shutdown
The US Dollar grapples with challenges caused by a prolonged government shutdown and delays in US economic data releases, potentially limiting the GBP/USD pair’s downside. The US government shutdown enters its fourth week after the Senate’s 50-43 vote, marking the third-longest in modern history.
A Reuters poll forecasts that 115 out of 117 economists believe the Fed will reduce interest rates by 25 basis points to a range of 3.75%-4.00% during the monetary policy announcement on October 29. Additionally, 83 economists expect two rate cuts this year, while 32 anticipate one.
The Pound Sterling, the world’s oldest currency and the UK’s official currency, ranks as the fourth most traded foreign exchange unit globally. Its value is heavily influenced by the Bank of England’s monetary policy decisions, economic data releases, and trade balance. Economic indicators like GDP, PMIs, and employment data significantly impact the Pound. A positive trade balance favours the currency’s strength, while deficits tend to weaken it.
The GBP/USD is facing downward pressure, trading around 1.3380, largely due to the UK’s worsening fiscal position. The government borrowing an extra £7.2 billion in just six months is a significant concern for the Pound’s strength. Traders are now cautiously awaiting the new inflation data to see if the situation is deteriorating further.
Inflation Numbers and Risk Management
We are seeing parallels to the high inflation period of 2022-2023, when UK CPI peaked at over 11%, forcing aggressive action from the Bank of England. With last month’s CPI coming in at 4.1%, any figure higher than expected could increase volatility significantly. This fiscal strain puts the Bank of England in a difficult position regarding future interest rate decisions.
Given the uncertainty around the upcoming UK inflation numbers, traders should consider using options to manage risk. Buying straddles or strangles on GBP/USD could be a viable strategy to profit from a large price swing, regardless of the direction. This allows traders to capitalize on the expected volatility without betting on whether the inflation data will be positive or negative for the Pound.
On the other side of the pair, the US Federal Reserve’s expected rate cut on October 29 is almost fully priced into the market. With the market anticipating a cut to a 3.75%-4.00% range, the actual rate decision is unlikely to cause a major shock. The real focus for derivatives traders should be on the Fed’s forward guidance and commentary about future policy.
The ongoing US government shutdown, now in its fourth week, is adding a layer of uncertainty and capping the dollar’s strength. Historically, similar shutdowns, like the 35-day event in 2018-2019, have led to erratic price action and weakened the dollar due to delayed economic data. This situation makes holding long dollar positions risky ahead of the Fed meeting.
We see GBP/USD caught between a fiscally strained UK and a politically gridlocked US, which could lead to choppy, range-bound price action. This scenario favors derivatives that profit from either a defined range or a sudden breakout. Selling an iron condor could be effective if consolidation is expected, while buying options remains prudent to capture any sharp moves following the key data releases.
