The GBP/USD pair reached its highest point since mid-September, trading around 1.3660 during the European session. This rise was fueled by stronger-than-expected UK Retail Sales and PMI data. Later today, the release of the US November Durable Goods Orders report could influence currency movements. UK Retail Sales, reported by the Office for National Statistics, increased by 0.4% in December, recovering from a 0.1% decline in November. This was better than the predicted further 0.1% drop. The British Pound’s strength is also linked to a generally weaker US Dollar, which fell to a four-month low today.

Reasons for US Dollar Weakness

The US Dollar’s decline is mainly due to geopolitical tensions, including President Trump’s comments about Greenland, fostering a “Sell America” mood. The GBP/USD pair saw some gains, trading above the mid-1.3600s and is likely to increase further. On Friday, the British Pound rose against the US Dollar, nearing the 1.3600 mark. Strength in UK economic data may change expectations for near-term interest rate cuts by the Bank of England. The pair increased by nearly 0.73% that day. With the Pound Sterling showing strength, we expect GBP/USD to stay above 1.3650. This momentum comes from solid UK economic data, shifting expectations for interest rate cuts by the Bank of England. The pair is now at its highest level in over four months. For those wanting to take advantage of this upward trend, buying call options on GBP/USD appears to be a smart move. This strategy allows for potential profits if the rise continues towards the 1.3800 level while limiting risks to the premium paid. The positive outlook for the Pound makes this an attractive trade.

Economic Indicators Favoring the Pound

This optimistic view of the Pound is backed by recent UK inflation data showing the Consumer Price Index (CPI) at 2.8% for December, slightly above the Bank of England’s target. Additionally, UK’s unemployment rate has dropped to 3.7%, a multi-year low that strengthens the case for a strong economy. These figures suggest the Bank of England might keep rates steady, which is good for Sterling. Conversely, the US Dollar remains broadly weak, with the Dollar Index (DXY) hitting new lows. The disappointing US Non-Farm Payrolls report from early January, which added only 95,000 jobs versus an expected 180,000, has raised expectations for a Federal Reserve rate cut by March. This growing difference in policy between the Fed and the Bank of England is a key factor driving the current GBP/USD rally. Similar movements occurred in early 2021 when optimism about the UK economy and a weaker dollar helped push the pair higher. Given this history, call options with strike prices near 1.3750 and 1.3800 for February or March expiries could provide good opportunities. This approach allows time for the current trend to develop fully. Traders uncertain about direction but expecting significant price moves may consider volatility strategies. With crucial central bank meetings approaching in February, a long straddle (buying both a call and a put option at the same strike price) could be beneficial, allowing for profits from a breakout in either direction. Create your live VT Markets account and start trading now.

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