Insights 
VT 
The GBP/USD pair has dropped for three consecutive days, reaching a near two-week low below 1.3300 due to fresh US Dollar buying. The USD Index has reached its highest since August despite expectations of a dovish Federal Reserve and concerns about a US government shutdown. Minutes from the Fed’s September meeting revealed a mostly unified decision to lower interest rates due to labour market risks, with members undecided on the frequency of cuts this year.
The GBP/USD attempted stabilisation on Thursday, trading around 1.3413 USD. However, concerns for the UK economy and uncertainty regarding the government’s November budget keep sentiment cautious. UK GDP is expected to grow moderately towards the year’s end, with inflation rising to 4%, twice the Bank of England’s target. Economic data suggests a slowdown after a strong start to 2025.
Sterling’s Influence By Global News
Sterling is influenced by global news and has followed the euro closely in recent weeks, maintaining a narrow range despite minimal selling pressure from the US government shutdown. External factors, strong USD, and inflation risks weigh on Sterling. Traders are focusing on UK economic developments, Bank of England policies, and potential updates from the US Federal Reserve affecting the exchange rate.
We are seeing the pound fall for a third consecutive day against a surprisingly strong US dollar, with the GBP/USD pair now trading below the 1.3400 mark. This dollar strength is unusual, as it comes despite the Federal Reserve signaling rate cuts and an ongoing government shutdown in Washington. This setup suggests the market is currently favoring the dollar as a safe haven.
The primary issue for sterling is the weak UK economic outlook. Recent data confirms the economy is losing momentum, with third-quarter GDP figures released last week showing growth of just 0.1%. With inflation forecast to hit 4% by year-end, we are facing a difficult stagflationary environment that severely limits the Bank of England’s policy options.
Fed’s Dovish Stance In The US
In the United States, the Fed’s dovish stance is being reinforced by weakening economic indicators. The latest US jobs report, for example, showed the economy added only 95,000 jobs in September, well below forecasts and validating concerns about the labor market. This strengthens our expectation for at least one more interest rate reduction before the end of 2025.
For derivative traders, this conflict between a strong dollar now and a dovish Fed later suggests volatility will rise. The UK’s clear economic troubles create a bearish bias for the pound. We are therefore considering buying put options on GBP/USD to protect against or profit from a further slide towards the 1.3200 support level.
Looking back, we saw a similar situation in late 2023, when markets anticipated Fed policy easing, but the dollar remained firm due to concerns over global economic stability. The current US government shutdown may be creating a similar safe-haven effect, temporarily overriding the fundamental weakness implied by future rate cuts. This suggests the dollar’s eventual decline may be delayed, not canceled.
