GBP/USD weakens to near 1.3150 during the early Asian session on Monday, ending a three-day losing streak. The US Dollar strengthens as the US Senate reaches a deal to extend government funding, which may ease the government shutdown.
Federal employees are expected to receive back pay and states to resume delayed federal transfers under the agreement. Certain departments may be funded through January 30, while others receive full-year appropriations, potentially supporting the US Dollar.
US Labour Market Concerns
Renewed US labour market concerns enhance expectations for further interest rate cuts by the Federal Reserve. Markets are pricing in a 66% chance of a 25 basis points rate cut in December.
The Bank of England maintained interest rates at 4.0% last week due to caution before the UK government’s Autumn Budget. Governor Andrew Bailey signalled upcoming rate reductions, with potential pre-Christmas cuts dependent on inflation outlook changes.
The Pound Sterling is the world’s oldest currency, accounting for 12% of FX transactions and is influenced by the Bank of England’s monetary policy. Economic data releases like GDP and the Trade Balance, which measure economic health and export-import differences, significantly impact the Pound’s value.
Given the US government funding deal, we see immediate downward pressure on GBP/USD, likely testing the 1.3100 level. Derivative traders could consider buying short-dated put options to capitalize on this momentum. This move is a classic risk-off sentiment unwinding, which tends to benefit the US dollar temporarily.
Labor Market and Policy Decisions
However, this dollar strength may not last, as renewed US labor market weakness is a significant factor. We saw in the October 2025 jobs report that Non-Farm Payrolls only grew by a modest 120,000, well below expectations and pushing the unemployment rate up to 4.2%. This weak data solidifies the market’s expectation, now at 66%, for a Federal Reserve rate cut in December.
On the other side of the pair, the Pound Sterling faces its own clear headwinds. The Bank of England’s recent decision to hold rates at 4.0% while signaling future cuts has made the pound less attractive. With the latest UK quarterly GDP figures from Q3 2025 showing a 0.1% contraction, the market is correct to price in a BoE rate cut before Christmas.
We are now watching a race between two central banks moving toward easier monetary policy. The key question for the coming weeks is which one will act more dovishly. Given the UK’s recent services PMI dipping to 49.8, indicating economic contraction, the pressure on the Bank of England seems more immediate.
Historically, we’ve seen resolutions to government shutdowns, like the one in early 2019, provide only a brief boost to the dollar before underlying economic trends reassert themselves. Therefore, traders should be cautious of this dollar rally and might find value in strategies that bet on longer-term sterling underperformance. Selling GBP/USD futures or establishing bearish risk reversals could be a viable approach for the weeks ahead.
