The Pound Sterling rose to near 1.3500 against the US Dollar amidst a slowdown in the US job market. The US Dollar Index remains vulnerable near a weekly low around 97.50, following a reduction of 32,000 employees in the private sector, contradicting expectations of a 50,000 increase.
Federal Reserve Set To Decrease Interest Rates
Signs of a cooling US job market have led to a greater likelihood for rate cuts by the Federal Reserve. At a policy meeting, it is expected that the Fed will decrease interest rates by 25 basis points to a range of 3.75%-4.00%.
BoE Deputy Governor Sarah Breeden raised concerns about tight monetary policy pushing inflation below the 2% target. The one-year forward expected CPI inflation by UK firms slightly increased to 3.5% in the quarter to September.
Amid a potential US government shutdown, the White House anticipates possible mass layoffs. The US Department of Labour may not release Initial Jobless Claims data, as the government remains shut down.
The Pound has extended gains against the US Dollar for five days. The GBP/USD pair aims to remain above the 20-day Exponential Moving Average around 1.3485, with significant support and resistance levels identified.
Expectations For Interest Rate Cuts
The Pound Sterling is gaining on the US Dollar, heading towards 1.3500. This is happening because the American job market is clearly slowing down, making the dollar less attractive. The ongoing US government shutdown is only expected to make these job conditions worse in the coming weeks.
We just saw this weakness confirmed in the latest official numbers released yesterday. The September Non-Farm Payrolls report showed a meager gain of only 45,000 jobs, falling far short of the 150,000 consensus. This continues the weak trend seen in the ADP private payrolls data from earlier in the week.
Because of this weak data, traders are now almost certain the Federal Reserve will cut interest rates later this month. The CME FedWatch tool now shows a 95% probability of a 25-basis point cut at the next meeting. This expectation of lower US interest rates is a primary driver weighing on the dollar.
At the same time, we hear Bank of England officials like Sarah Breeden worrying about keeping UK rates too high for too long. Her comments suggest the BoE could also be preparing to cut rates in the future. This creates some uncertainty and could limit how high the Pound can go.
Given this outlook, buying GBP/USD call options to profit from the upward momentum is a clear strategy. However, a bull call spread might be a smarter play, allowing us to profit from a move up to the 1.3700 area. This approach limits risk if the Bank of England’s dovish stance begins to weigh on the pound.
The US government shutdown is making markets nervous, and we’ve seen one-month implied volatility for GBP/USD tick up to 9.5%. This higher volatility makes selling the higher-strike call in a spread more attractive. It also means we should all be prepared for larger and more sudden price swings based on news out of Washington.
This situation feels similar to the market choppiness we experienced during the US political standoffs back in 2023. We learned then that while the underlying economic trend is key, headline risk can cause sudden, sharp moves against the prevailing direction. Therefore, using defined-risk strategies like spreads is prudent.
For now, the pair is fighting to stay above its 20-day moving average around 1.3485, which is a positive sign for the immediate trend. A successful break higher brings the September high of 1.3726 into focus. This level serves as a logical target for any bullish derivative positions established now.
Looking ahead, the next major test will be the upcoming inflation reports from both the US and the UK. These CPI numbers will be critical in shaping whether the Fed or the BoE acts more decisively on interest rates. Traders should watch this data closely as it could easily alter the current market sentiment.
