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It's an allied impulse. A neutral US moves 2 CPs into the Faeores Gap. CW made no additional naval moves to the Faeores Gap this impulse.

The German player (non-phasing) is given the option to initiate.

Is this correct?

Yes. RAW:

Opponent’s naval combat
After your side has resolved combat in all their selected sea areas, any
major power on the other side can try to initiate combat (see 11.5.2) in
any other sea areas your side moved a non-SUB unit into or within
(but not through) in your naval air missions step or your naval
movement step. Your opponents can't pick an area that has already
been selected this impulse.

ORIGINAL: Centuur

Yes. RAW:

Opponent’s naval combat
After your side has resolved combat in all their selected sea areas, any
major power on the other side can try to initiate combat (see 11.5.2) in
any other sea areas your side moved a non-SUB unit into or within
(but not through) in your naval air missions step or your naval
movement step. Your opponents can't pick an area that has already
been selected this impulse.

Thanks! Very interesting. Essentially, a neutral major power can initiate an encounter between belligerents and watch it sitting it out on the sidelines.

IMHO this mecanism is needed to allow search&seizure by the other side against 'neutral' shipping