The Pound Sterling (GBP) has been stable against more volatile currencies but faced challenges against safer options at the start of the week. This comes as traders expect the Bank of England (BoE) to gradually ease monetary policy in 2026. In December 2025, the BoE cut interest rates by 25 basis points to 3.75% with a 5-4 vote, indicating that further gradual reductions are likely. During Asian trading hours, GBP/USD has held around 1.3420, dropping for the second day in a row. A daily chart analysis shows the 14-day Relative Strength Index (RSI) at 53, which has shifted from a near overbought position and remains neutral. While momentum is slowing, the RSI stays above 50, indicating a slight bullish trend.

Currency Expectations

In the short term, the GBP is expected to trade between 1.3430 and 1.3490. Over a longer period, indicators appear stable, suggesting the currency will range between 1.3400 and 1.3535, as assessed by UOB Group’s Quek Ser Leang and Peter Chia. Additionally, other currency movements have been noted, such as the USD/JPY declining due to weak US industrial data, and the JPY reflecting cautious sentiment linked to Venezuela’s situation. The BoE’s plan for gradual rate cuts suggests lower volatility for the Pound Sterling. The 5-4 vote on the last rate decision in December 2025 indicates a divided committee, meaning unexpected data could lead to strong market reactions. For now, the anticipated slow movements from the BoE should limit substantial gains for the pound against currencies with more aggressive central banks. The technical outlook indicates a range-bound market, with GBP/USD likely staying between 1.3400 and 1.3535. This market condition is favorable for selling option premiums, as significant directional moves are unlikely. Traders might consider strategies like iron condors or short strangles, positioning strikes outside this expected range to take advantage of theta decay over the next few weeks.

Market Risks and Strategies

However, the ongoing crisis in Venezuela poses a risk of sudden market shifts, making the sale of naked volatility precarious. This risk aversion is evident in the gold market, which has surged past $4,400 an ounce, signaling a shift towards safety. Therefore, any short volatility trades should be risk-defined, using spreads to limit potential losses if the geopolitical situation worsens rapidly. The BoE’s cautious stance is also backed by economic trends observed last year. UK CPI inflation steadily declined throughout 2025, dropping from over 4% to near the 2% target by the fourth quarter, which lessened the urgency for strict policies. This environment reinforces the idea that the BoE is unlikely to surprise the market with aggressive moves, keeping the pound anchored in its current range. For traders who expect the 1.3400-1.3535 range to hold, selling a February options strangle could be a solid strategy for generating income. A more conservative choice would be to use an iron condor, placing short strikes around 1.3400 and 1.3550. This method benefits from time decay and low volatility while clearly defining the maximum potential loss. The next significant event will likely be the upcoming UK inflation and jobs data for December 2025. A notable deviation from forecasts could challenge the BoE’s “gradual” approach and possibly break the current trading range. Thus, traders should stay flexible and ready to adjust their positions if this crucial data surprises the market. Create your live VT Markets account and start trading now.

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