The GBP/USD pair remains above 1.3300, benefiting from the Bank of England’s (BoE) cautious policy. BoE member Catherine Mann emphasised a prolonged restrictive monetary stance due to persistent inflation and modest growth prospects.

Uk Government’s Economic Strategy

The UK government aims to control wages by preventing emergency funds for pay rises, stating this would support economic stability. However, the GBP/USD could weaken as the US government shutdown influences the US Dollar.

In the US, the Federal Reserve’s policy remains dovish. Fed President Mary Daly noted lower-than-expected inflation, while Fed Governor Michael Barr highlighted challenges in policy assessment, noting difficulties in gauging shutdown effects.

The Pound Sterling is the world’s oldest currency and accounts for 12% of global FX transactions. The BoE influences its value primarily through interest rate adjustments aimed at maintaining price stability. Economic data such as GDP and trade balance figures also affect GBP’s value.

Trade balance data impacts the Pound, with a positive balance strengthening the currency. A country’s robust exports attract foreign investment, boosting demand for its currency. Conversely, a negative trade balance weakens the currency by decreasing foreign demand.

Central Bank Policies and Their Impact

We are seeing the Pound hold steady against the Dollar, supported by the Bank of England’s firm stance. The BoE is signaling that interest rates, currently at 5.00%, will need to stay high for a while to combat stubborn inflation. The latest inflation numbers from September 2025 confirmed this, with UK CPI holding at 3.1%, still well above the 2% target.

This contrasts sharply with the situation in the United States, where the Federal Reserve appears more dovish. With US inflation cooling to 2.5% last month and the September jobs report showing weaker-than-expected hiring, the Fed has already cut rates. This growing interest rate difference between the UK and the US puts upward pressure on the GBP/USD pair.

However, the ongoing US government shutdown, now in its tenth day, is the main source of uncertainty. We saw during the 35-day shutdown in 2018-2019 that prolonged political deadlock can trigger a flight to safety, strengthening the US Dollar regardless of Fed policy. This risk could easily push GBP/USD back below the 1.3300 level if the situation in Washington worsens.

For derivatives traders, this sets up a classic conflict between economic fundamentals and political risk. The clear divergence in monetary policy suggests buying GBP/USD call options to profit from a potential move higher, targeting the interest rate advantage. This view is supported by the pair’s resilience, which has not seen these levels since early 2024.

Given the shutdown risk, however, implied volatility is likely to rise in the coming weeks. A long straddle or strangle options strategy on GBP/USD could be a prudent way to trade this uncertainty. This position would profit from a large price swing in either direction, whether it’s a rally driven by the BoE or a sharp drop caused by a US-led risk-off event.

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