The GBP/USD pair experienced a robust rally during early European trading, ascending to 1.3365, as market participants anticipated an almost certain 25 bps rate cut by the U.S. Federal Reserve. Market participants currently assign a 97% likelihood to the Federal Reserve reducing its benchmark rate to a range of 3.75%–4.00%, in light of the recent data indicating a 3.1% year-over-year inflation rate, a decrease from 4.0% observed in late 2024. The shift in policy, along with the positive UK economic indicators, signifies a notable change in sentiment following six straight sessions of decline that brought the pair close to 1.3300. The pound’s recovery indicates a resurgence in investor interest for risk assets as the dollar’s prolonged bullish trend starts to diminish. The U.S. dollar has faced ongoing challenges since the inflation report released last Friday, as investors are increasingly confident that the Federal Reserve will implement its second consecutive rate cut this week. The CPI’s 3.1% reading, coupled with indications of moderating wage growth, provides the Fed with sufficient leeway to implement further easing following its September reduction. Derivatives traders have observed a significant increase in GBP/USD option activity, especially in short-dated call contracts. This trend indicates that the market is preparing for a potential upside breakout, contingent on the Fed adopting a more dovish stance or indicating a third rate cut in December 2025. The recent developments have led to the Dollar Index falling below 105.60, marking its lowest point in a month.
The increase in Sterling is bolstered by a 0.6% rise in UK Retail Sales for September, alongside a flash Composite PMI that has risen to 51.5, indicating consistent growth. The services sector, which accounts for more than 70% of UK GDP, demonstrates ongoing resilience, leading to tempered expectations regarding a potential Bank of England rate cut in November. However, with inflation easing to 2.8%, the Bank of England faces a delicate balancing act. Market participants are assessing a 60% likelihood of a Bank of England rate cut by December; however, this expectation has not dissuaded short-term purchases of the pound, as investors are taking advantage of the current dollar weakness driven by Federal Reserve actions. From a technical perspective, GBP/USD has formed a support level at 1.3330, while the 50-period moving average is positioned at 1.3360 and the 100-period moving average at 1.3380, serving as immediate resistance levels. A breakout above 1.3380–1.3400 would reveal the next resistance level around 1.3460, coinciding with the 200-period MA, where selling pressure has historically limited upward movement. The RSI at 54 suggests a moderate bullish trend, and with implied volatility staying subdued, this presents a chance for leveraged traders to prepare for movements following the Fed’s decisions by utilizing long straddles or short-dated calls. Below 1.3330, immediate support is positioned at 1.3300, with subsequent support at 1.3250, levels that have not been consistently observed since early 2022.
Positive sentiment regarding a possible U.S.–China trade agreement has enhanced market confidence worldwide. Presidents Donald Trump and Xi Jinping are set to convene in South Korea this week, with anticipations of revitalized collaboration on rare-earth supply chains and technology tariffs. The recent developments have positively impacted high-beta currencies such as the pound, which typically exhibit strong performance in risk-on environments. The reduction in geopolitical tensions has positively influenced copper prices, currently at $11,094/mt, along with other cyclical assets. This development indicates a wider investor confidence that is also impacting the foreign exchange market. While there is notable strength in the near term, the upcoming Bank of England meeting on November 6 and the UK Autumn Budget on November 26 pose considerable event risks. Policymakers are at an impasse: certain factions support proactive easing measures to mitigate the impacts of fiscal tightening, whereas others advocate for postponement until inflation aligns with the 2% target. The CBI Retail Sales Index has improved to -27 in October from -29, indicating fragile retail sentiment. However, expectations for November have deteriorated to -39, highlighting weak domestic confidence. The upcoming decisions by BoE Governor Andrew Bailey will be shaped by these data points, given that the alignment of monetary and government policy is essential for the direction of sterling.
The implied volatility in GBP/USD is currently low compared to historical standards, as 1-week options are indicating a 0.45% movement following the Fed’s announcement. Market participants are leaning towards purchasing near-term calls to take advantage of the immediate momentum following the decisions, while simultaneously offloading late-November expiries, expecting a period of consolidation after the Bank of England and budget announcements. The analysis indicates a market anticipating short-term gains, followed by a medium-term stabilization around the 1.3350–1.3400 range. The disparity in monetary policy between the Federal Reserve’s easing stance and the Bank of England’s careful approach is the foundation of the ongoing rally. The U.S. Treasury yields have experienced a decline, with the 10-year yield now at 3.74%, marking its lowest point since July, whereas UK gilts are holding steady at approximately 4.05%. The significant narrowing of the rate differential has notably favored the pound. However, the fiscal challenges in the UK — such as budget constraints and reduced public expenditure — may limit gains if economic growth weakens as we approach Q4. The current market positioning indicates a bullish outlook for the near term. Currently, GBP/USD is positioned at 1.3365, and momentum indicators indicate a possible upward movement towards the range of 1.3400–1.3460, dependent on dovish statements from the Fed. On the other hand, a hawkish surprise or disappointing UK budget expectations may lead to a rapid shift back to 1.3250. For professional traders, long call spreads present a favorable opportunity to capitalize on the 1.3400 breakout, whereas macro-focused investors might consider December’s dual Fed-BoE policy window for strategic entries.