Insights 
VT 
The Pound Sterling has recently dropped to near 1.3370 against the US Dollar, continuing its decline for three days in a row. This decrease comes as US-China trade tensions lessen, enhancing the US Dollar’s attractiveness over the Pound. As of Monday, the US Dollar Index, which measures the dollar’s strength against six major currencies, increased by 0.25% to nearly 98.85.
The revised inflation rate in the UK, expected to be at 4% for September, aligns with Bank of England’s predictions and could impact forthcoming economic policy decisions. The core UK CPI also anticipates a slight increase to 3.7% from 3.6%. Meanwhile, the US CPI is projected to grow at 3.1%, maintaining its previous rate. These higher inflation expectations place pressure on both the UK and US central banks in their upcoming monetary discussions.
Technical Analysis
From a technical perspective, the Pound Sterling is struggling against the US Dollar, now nearing 1.3370. It remains below the 20-day EMA, with the Relative Strength Index indicating a sideways trend. The level of 1.3140 would be a critical support point, while 1.3500 is established as a potential resistance level.
We are seeing the Pound continue its slide below 1.3400, driven by a stronger US Dollar. This dollar strength is fueled by optimism over a US-China trade agreement, a dynamic similar to what we observed during the 2018-2019 trade disputes. Options traders could consider buying puts on GBP/USD to position for a further drop toward the 1.3300 level mentioned in the technical analysis.
The key events this week are the inflation reports from both the UK on Wednesday and the US on Friday. While UK headline CPI is expected to hit a high of 4%, this is not supporting the Pound, suggesting the market is more worried about a cooling UK job market. The US CPI is also expected to rise to 3.1%, yet the market is still pricing in Federal Reserve rate cuts.
Market Volatility
We should remember the extreme volatility in Sterling from just a few years ago, specifically during the 2022 “mini-budget” crisis which saw GBP/USD plummet over 10% in a single month. Current data from the CME FedWatch tool shows a nearly 75% probability of at least one Fed rate cut by December, indicating the market is prioritizing growth concerns over inflation. This divergence between central bank expectations makes the US Dollar’s current strength particularly notable.
Beyond the Pound, the Dollar’s strength is most pronounced against the Japanese Yen, as shown in the currency heatmap. Easing geopolitical tensions are weighing on the safe-haven Yen, a trend that has historically accelerated during periods of positive risk sentiment. This makes long USD/JPY positions an interesting alternative for expressing a bullish view on the Dollar.
