GBP/USD is trading near 1.3420, marking losses for the second day in a row. The 14-day Relative Strength Index (RSI) is at 53, indicating a drop in momentum but still showing a slight bullish trend since it stays above 50. The nine-day Exponential Moving Average (EMA) is above the 50-day EMA, suggesting a bullish trend, although the short-term momentum has stalled. If GBP/USD closes above the nine-day EMA of 1.3455, it may test the three-month high of 1.3534 and possibly the six-month high of 1.3726.

Support and Resistance Levels

The psychological barrier of 1.3400 acts as initial support, followed by the 50-day EMA at 1.3363. If GBP/USD drops below these levels, it could slide towards the eight-month low of 1.3010. Today, the British Pound has declined by 0.34% against the US Dollar, as well as falling 0.26% against the Euro and 0.22% against the Yen. These shifts are illustrated in a heat map that shows percentage changes among major currencies. We remember a similar cooling trend around this time in 2025, when GBP/USD fell towards the 1.3400 level. On January 5, 2026, that level is now a significant resistance level. Currently, the pair struggles to remain above 1.3250 due to the persistent strength of the dollar. Recent data indicates UK inflation remains high at 3.5% as of late last year, complicating the Bank of England’s plans. In contrast, US inflation has decreased to 2.8%, granting more flexibility to the Federal Reserve. This growing gap in monetary policy favors the US Dollar over the Pound Sterling.

Hedging Strategies for Volatility

Given the current situation, implied volatility for GBP/USD options is rising, particularly for one- and two-month contracts. Traders might look to buy puts or create put spreads to hedge against a possible drop to the 1.3100 level, seen in autumn 2025. This can safeguard against potential losses while managing trade costs. The forward markets reflect this interest rate difference, showing a deeper discount for GBP/USD than what was seen in late 2025. This suggests that the market expects further weakness in the Pound during the first quarter of 2026. For those holding long positions, using short-dated futures contracts may effectively manage this upcoming dip. Despite the growing bearish sentiment, we are monitoring the 50-day EMA, currently around 1.3210, as an essential short-term support level. A break below this line in the next few weeks could erase the modest bullish trend we saw last year and indicate a more significant downward move, possibly targeting the 1.3000 level. Create your live VT Markets account and start trading now.

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