The Pound Sterling has risen for the fifth day in a row against the US Dollar, nearing 1.3480. This increase comes as the US Dollar struggles, driven by growing expectations that the Federal Reserve will cut interest rates. The US Dollar Index is down 0.17% at around 98.00 as confidence grows about a possible 25 basis point rate cut from the Fed. Concerns about Fed monetary policy have eased as the labor market shows signs of softening.

Impact of Monetary Policies

Fed Governor Michelle Bowman mentioned over the weekend that she expects three interest rate cuts this year. In the UK, expectations for additional Bank of England rate cuts are lower, with the next cut not anticipated until February. Recently, the UK lowered interest rates by 25 basis points to 4%. Chief Economist Huw Pill expressed doubt about further cuts as inflation expectations rise. Rate changes are now closely linked to inflation forecasts. Analysts will keep an eye on upcoming labor market data from the UK and US Consumer Price Index (CPI) figures. The UK Unemployment Rate is predicted to stay at 4.7%, while the US CPI may rise by 2.8%. Technical analysis of GBP/USD shows a possible bullish reversal, with support around 1.3140 and resistance near 1.3585. Looking back to last year, the Pound Sterling was strong against the US Dollar, trading near 1.3480. This strength was due to expectations that the Federal Reserve would cut rates while the Bank of England would hold steady. This scenario clearly favored the pound.

Shift in Economic Strategies

Now, as we enter August 2025, the economic landscape has changed dramatically, necessitating a shift in our strategies. The US Dollar is much stronger, with the US Dollar Index recently climbing past 106, as US core inflation remains stubbornly above 3%. The Fed is no longer considering rate cuts, and GBP/USD is struggling to stay above the 1.2250 mark. In the UK, the economy weakened more than expected in 2024. After disappointing GDP figures in the second quarter of 2025, the Bank of England has had to ease policy more aggressively than anticipated. This divide in central bank policies now heavily affects the Pound. For derivative traders, the outlook for GBP/USD appears bearish in the coming weeks. Options could be used to protect against or profit from further declines, with a potential target near the 1.2000 mark. Selling call spreads above 1.2400 may also be a good way to generate income while maintaining a bearish stance. It’s vital to monitor key data points. The upcoming US non-farm payroll report and the UK’s inflation data for July could be major catalysts. Any signs of ongoing US economic strength or UK weakness are likely to further pressure the Pound. We can compare this situation to 2014, when diverging policies between a tightening Fed and an easing European Central Bank led to a long-term trend of dollar strength. The current conditions resemble that period, suggesting the trend may continue. Therefore, we should remain cautious about any short-term rallies in the Pound. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now