Current Market Conditions

The Daily Elliott Wave Charts for GBP/USD highlight a rally that began at the low on January 13, 2025. This rally is considered an impulse sequence, indicating further upward movement. The analysis suggests buying on dips, particularly in the blue box areas during the third, seventh, or eleventh swings. On January 11, 2025, the Daily Elliott Wave Chart indicated that the rally reached a peak of $1.3789, completing wave (3). A pullback, known as wave (4), followed, where a double three correction finished wave W at $1.3142. Wave X rebounded to $1.3726, and now wave Y is moving down toward the blue box area of $1.3082-$1.2683. Right now, GBP/USD is trading above 1.3400, buoyed by stronger-than-expected December Manufacturing and Services PMIs. This is happening as the market looks forward to US labor reports and retail sales data. The British pound remains strong, nearing a two-month high while these economic figures are awaited. The market is experiencing some volatility, with GBP/USD recently dropping below 1.3350 following UK inflation data. Other currency pairs, like USD/CHF and GBP/JPY, are showing similar fluctuations due to changing global economic conditions. We believe the GBP/USD rally since January 2025 is part of a larger bullish trend. The pair is currently in a corrective pullback, and we expect this dip to find support. The crucial levels for buyers to consider are between $1.3082 and $1.2683.

Monetary Policy Divergence

Recently, price movement has been volatile, with GBP/USD jumping above 1.3400 due to strong preliminary PMI figures for December. However, this strength is being questioned because of weaker UK inflation data. The Consumer Price Index (CPI) for November was just 2.1%, lower than expected, increasing the chances that the Bank of England may ease its policy in early 2026. This monetary policy outlook for the UK is different from that in the United States, where inflation has been more persistent. The latest US inflation reading for November was 3.5%. This difference suggests that the US dollar may be stronger, potentially pushing the pound lower in the short term. The upcoming US labor report and retail sales data will be crucial for confirming this trend. For derivative traders, the blend of technical support and bearish fundamentals is leading to higher uncertainty. One-month implied volatility for GBP/USD has climbed to 9.5%, up from an average of 8% last month, indicating that traders expect larger price movements. This scenario makes strategies like buying straddles or strangles attractive, as they can profit from increased volatility, regardless of direction. Given the mixed signals, a cautious approach is recommended before making large bets. We should monitor price action as it nears the $1.3082 level for signs of stabilization or a bullish reversal. If this support zone fails to hold, it could undermine the long-term upward trend observed in 2025. Create your live VT Markets account and start trading now.

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