GBP/USD Trapped in Narrow Range as Rate Gap Disappears

The GBP/USD currency pair has been trading in a tight range, with the price sitting at 1.3544 after recovering from the September 2 low of 1.3473.

The Bank of England's Bank Rate is currently at 3.75%, while the Federal Reserve's target range is 3.50% to 3.75%, resulting in a 12.5 basis point differential in favor of sterling.

This rate gap has been shrinking over the past four years, and its disappearance has made the GBP/USD trade more sensitive to sentiment, positioning, and political headlines.

The absence of a yield gap has consequences beyond low volatility, and recent events have demonstrated that politics can be a major driver of sterling's value.