The Pound Sterling strengthened due to positive news from UK Retail Sales and flash PMI data. Retail Sales rose by 0.4% in December, beating expectations of a 0.1% decline. The PMI data showed improvement, with the Composite PMI climbing to 53.9 from 51.4.

Boost in Economic Indicators

The Services PMI reached 54.3, exceeding forecasts of 51.7, while the Manufacturing PMI increased to 51.6. The Office for National Statistics noted that Retail Sales, a measure of consumer spending, grew by 2.5% year-over-year. This figure tops expectations of a modest 1% increase. The Pound gained against major currencies, particularly the Swiss Franc. Even with a slight rise in the US Dollar, the Pound continued to advance, hitting a multi-week high of 1.3535 against the Dollar. The Federal Reserve is expected to keep interest rates steady in its next meeting. Trade and geopolitical tensions have impacted the value of the US Dollar. The interest rate decision by the Federal Reserve will be critical, as it greatly affects USD movements. A hawkish outlook could hint at future rate hikes, while a dovish stance might suggest potential cuts, influencing the USD’s strength. The unexpectedly strong UK economic data, especially retail sales growth and the PMI rise to 53.9, signals robust economic health. This contradicts prior assumptions that the British economy was deteriorating. The Pound’s sharp rise to nearly 1.3536 against the Dollar illustrates this shift in sentiment.

Monetary Policy Outlook

Markets are quickly adjusting their expectations of imminent rate cuts from the Bank of England. Previously, they anticipated aggressive cuts by the end of 2025, but these new figures indicate that the BoE can afford to take its time. This bodes well for the Pound in the short term. This economic strength supports the notion that UK inflation, which averaged 3.8% in the last quarter of 2025, may take longer to decrease. Strong consumer spending and business activity are likely to keep price pressures high, reinforcing the Bank of England’s hawkish stance in the upcoming February meeting. Meanwhile, the Federal Reserve is expected to maintain its rates at 3.75% next week. This creates a clear difference in monetary policy between the UK and the US for now. Ongoing US trade disputes and geopolitical tensions may weaken the Dollar further. Considering these factors, we should explore buying call options on GBP/USD. This strategy allows us to benefit from a possible continued rise in the currency pair while minimizing our downside risk to the premium paid. Look for options with strike prices near the 1.3625 resistance level, ideally expiring in late February or March. Additionally, implied volatility for the Pound is lower compared to the levels seen in 2025. This suggests that option premiums are well-priced for entering long positions now. A move above the 1.3550 level might attract more buying interest. Next week’s Fed meeting is pivotal, but attention will soon turn to the Bank of England’s decision in early February. Any hawkish comments from the BoE could be the next boost for the Pound. We must closely monitor inflation data from both countries. Create your live VT Markets account and start trading now.

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