**Speculation Impact on USD** The currency pair saw a bearish gap during the Asian session, staying just below the mid-1.3400s, down by 0.10%. Despite a lack of strong selling, geopolitical events, such as US military actions in Venezuela, pressured GBP/USD and drove safe-haven flows toward the USD. The USD Index (DXY) gained from this, building on its recent recovery. Speculation about possible US Federal Reserve interest rate cuts might limit further USD gains. On the other hand,GBP is supported by easing concerns over the UK budget and a hawkish outlook from the Bank of England (BoE). This contrasts with the Fed’s stance, which may restrict GBP/USD’s decline. The BoE’s decision to lower rates by 25 basis points to 3.75% in December, with a narrow vote split, changed expectations regarding aggressive easing, potentially benefiting GBP. Data shows that the USD is strongest against the Australian Dollar, with mixed performance against other currencies. A heat map illustrates the percentage changes between major currency pairs, highlighting movements like USD strengthening against JPY. Looking back a year, the US Dollar strengthened due to geopolitical risks, including tensions over Venezuela. However, in 2025, the main theme was the difference between the Federal Reserve and the Bank of England’s policies, pushing GBP/USD higher. The pair is currently holding above the 1.3800 level. **UK Political Risk and Market Strategies** Since early 2025, the safe-haven demand for the dollar has decreased as specific military risks have eased. Now, the focus for the pound is the upcoming UK general election later this year, which is starting to create some uncertainty. This political risk is a new concern compared to last year. As expected, the Federal Reserve began cutting interest rates in 2025, implementing three cuts of 25 basis points throughout the year. The latest US inflation report from December 2025 showed core CPI at 2.9%, reinforcing the market’s belief that the Fed will keep easing. This ongoing shift in policy continues to be a headwind for the USD against major currencies. In contrast, the Bank of England maintained its position longer due to persistent UK wage inflation, which remains above 5%. While the BoE eventually followed the Fed in cutting rates, they did so more cautiously, widening the interest rate gap in favor of the pound. This policy difference remains key support for GBP/USD. Because of this ongoing policy divergence coupled with rising UK political uncertainty, traders should consider strategies that capitalize on potential gains in GBP/USD while protecting against sudden drops. Buying call options on GBP/USD could allow for further profits if the uptrend continues toward the 1.4000 mark. A more cautious approach would be using bull call spreads to lower initial costs while still positioning for a measured increase in the coming weeks. Create your live VT Markets account and start trading now.

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