The GBP/USD exchange rate jumped above 1.3540 after positive news from the UK. Retail Sales in December rose by 0.4%, much better than the expected 0.1% drop. Annual sales also exceeded forecasts, going from 1.8% to 2.5%, while only 1% growth was anticipated. In January, UK business activity improved significantly. Services and Composite PMIs increased to 54.3 and 53.9, respectively. This news suggests that the Bank of England might take a less cautious approach, changing traders’ views on future interest rate cuts.

Consumer Sentiment and Inflation in the US

In the US, the final University of Michigan Consumer Sentiment for January reached a five-month high of 56.4, which was higher than expected. US inflation expectations fell slightly, showing a one-year estimate of 4% and a five-year estimate of 3.3%. The technical outlook for GBP/USD points to more potential gains. Resistance is seen at 1.3788, with support starting at 1.3452. The Bank of England’s decisions on monetary policy greatly influence currency value, and key economic indicators like GDP and trade balance also impact the Pound. Given the strong UK economic data, it’s likely the Bank of England will avoid cutting interest rates anytime soon. The unexpected strength in retail sales and business activity eases the pressure on the bank, leading traders to expect fewer rate cuts this year—a positive sign for the Pound. This trend is further supported by the latest inflation data from the Office for National Statistics. The UK’s core Consumer Price Index (CPI) remains high at 3.9%, well above the Bank of England’s target of 2%. Governor Greene’s worries about wage growth seem warranted, as this ongoing inflation supports keeping rates higher for a longer time than other central banks.

US Economic Outlook and Market Impact

In contrast, the US economy shows mixed signals, leading to diverging policies. Although US consumer sentiment has improved, the Bureau of Labor Statistics reports a slight rise in weekly jobless claims, signaling a weakening labor market. The CME FedWatch Tool indicates that the market anticipates over 100 basis points of interest rate cuts from the Federal Reserve by 2026, which weakens the US Dollar. For derivatives traders, this suggests they should anticipate a continued rise in the GBP/USD exchange rate, particularly if it surpasses the 1.3600 mark. Strategies like buying call options or setting up bullish call spreads on GBP/USD could benefit from this expected growth. The key factor is the widening gap between a cautious Bank of England and a Federal Reserve likely to cut rates. A similar situation occurred in 2023 when expectations of quicker rate hikes by the Bank of England compared to the Fed led to a significant GBP/USD rally over several months. This historical pattern of policy divergence boosting the Pound appears to be returning. Traders should closely monitor upcoming central bank meetings for any shifts in tone that could strengthen or reverse this trend. Create your live VT Markets account and start trading now.

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