The GBP/USD pair increased to about 1.3435 during early European trading on Thursday. This rise followed news that UK Consumer Price Index (CPI) inflation reached 3.4% year-over-year in December, which was above the expected 3.3% and an increase from November’s 3.2%. The unexpected jump in UK inflation supported the Pound Sterling, often called the Cable when paired with the US Dollar. The monthly CPI rate also improved to 0.4% in December, rebounding from a 0.2% drop in November, matching market expectations.

US Economic Factors

In the US, President Donald Trump’s decision to withdraw a proposal for tariffs on European goods eased some trade tensions. However, markets are still paying close attention to upcoming US economic indicators, including Gross Domestic Product (GDP), Jobless Claims, and the Personal Consumption Expenditures (PCE) Price Index. Strong results in these areas could boost the USD and affect the GBP/USD pair. The Pound Sterling is the UK’s official currency and the fourth most traded currency worldwide. Its value is largely influenced by the Bank of England’s interest rate decisions, which aim for a stable inflation rate around 2%. Economic indicators like GDP, PMIs, and employment figures also impact its worth. With UK inflation unexpectedly high at 3.4%, the chance of a near-term Bank of England rate cut has diminished. Markets have fully ruled out a rate cut for the first quarter, with swaps indicating a hold until at least the summer meeting. This shift to a more aggressive stance is a key reason for the pound’s current strength. For derivative traders, this situation increases the cost of options as uncertainty around the Bank’s direction grows. Front-end implied volatility for GBP/USD has risen from about 7% to over 8% this week due to the surprising inflation data. While this increase suggests it may be pricier to bet on market direction, it also creates opportunities for those looking to sell volatility in more stable conditions.

Future Economic Developments

The upcoming US Personal Consumption Expenditures (PCE) data will be the next significant driver for the pair. Core PCE held steady at about 2.8% at the end of 2025, and another strong figure may support the US dollar and challenge the pound’s recent strength. A robust reading could limit the GBP/USD rally around the key resistance level of 1.3500. President Trump’s withdrawal of tariff threats on European goods has reduced some global risks, which sometimes weigh on the safe-haven dollar. Nonetheless, this is a lesser factor compared to the differing paths of central banks currently in play. We believe that interest rate differentials will capture more market attention in the weeks ahead. Reflecting on the sharp currency swings of 2025, it’s evident that betting against continued inflation has been a losing strategy. This situation feels reminiscent of last autumn when markets got ahead of themselves with central bank changes. Thus, using options to manage risk, like buying call spreads to aim for a move to 1.3550, may be wiser than holding outright long positions. Create your live VT Markets account and start trading now.

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