The GBP/USD pair rose by 0.59% to 1.3450 after the UK economy grew by 0.1% quarter-on-quarter and 1.3% year-on-year in Q3. Although there are expectations for the Bank of England (BoE) to ease its policies in 2026, the pound strengthened due to the positive growth data, especially with thin trading before Christmas. Recently, UK inflation eased, leading BoE Governor Andrew Bailey to support possible rate cuts. The market anticipates 37 basis points of easing in 2026. In the US, Fed officials have differing opinions on inflation, and November’s CPI may not fully reflect yearly increases.

Technical Analysis

Technical analysis indicates that GBP/USD has bounced back above the 200-day simple moving average (SMA) and reached a new monthly high of 1.3457. If it exceeds 1.35, the pair could test the October 1 high of 1.3527. However, if it falls below 1.3400, it may reach the 100-day SMA at 1.3369. This month, the British Pound (GBP) has performed well, especially against the Japanese Yen. The GBP rose 2.45% against the Yen and 0.58% against the USD, while the Euro saw smaller gains. The current increase in the pound above 1.3400 responds directly to stable UK growth figures. With many traders away for the holidays, the low trading volume is magnifying this rise. We should view this as a short-term reaction rather than a fundamental market change.

Market Sentiment and Volatility

We are experiencing a disconnect between current price movements and future expectations. While current data appears supportive, the market is already pricing in 37 basis points of interest rate cuts by the BoE for 2026. This perspective is heavily shaped by November’s inflation data, which fell to 3.9% from 4.6% in October. Uncertainty in the US is adding to market fluctuations. Cleveland Fed President Hammack is concerned about inflation, while the latest US CPI for November showed an inflation rate of 3.1%. This has encouraged more dovish Fed members like Governor Miran to suggest that rate cuts are on the way. The internal debate at the Fed makes the dollar’s direction unclear, resulting in volatility for the pair. In the next week or two, we can capitalize on this upward momentum. Buying short-dated call options with a strike price around 1.3500 might yield further gains if this holiday rally continues towards the October high of 1.3527. This is a strategic move for the current thin market conditions, similar to previous spikes we saw, like those in late 2022. However, we should also prepare for potential downturns as the new year approaches. Buying put options for February or March 2026, or even selling futures contracts, could help position us for the expected decline once the focus shifts back to the BoE’s easing cycle. Fundamental factors will eventually dominate the price movements, much like the rate hike cycle did in 2023. Timing the shift in sentiment will be crucial when full trading volume returns in January. We could look to close any short-term bullish positions and start bearish ones if the price stalls near the 1.3500-1.3530 resistance area. Given the mixed signals, strategies that benefit from increased volatility, such as a long straddle, could also be effective as the market seeks clearer direction. Create your live VT Markets account and start trading now.

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