Traders Watch Federal Reserve Decision

If GBP/USD goes above 1.3700, it could aim for highs around 1.4000. If it drops below 1.3650, it might test the January low and reach 1.3600. The Pound Sterling is the official currency of the UK, making up 12% of global foreign exchange transactions. The Bank of England’s interest rates significantly impact its value. Economic factors like GDP and PMIs affect the Pound as strong data usually boosts its value. The Trade Balance also plays a role; a positive balance can help strengthen the currency. A year ago, the US Dollar weakened on rumors about a joint intervention with Japan, moving GBP/USD to near 1.3700. That situation was strong enough to overshadow good US economic data. Today, the dollar is strong, which is the main trend in early 2026.

Differences in Monetary Policy

The Federal Reserve’s position has shifted dramatically from early 2025. Recent US CPI data shows inflation stubbornly above the target at 3.8%. The Fed now indicates a “higher for longer” approach, contrasting sharply with the expected easing of 44 basis points a year ago. This has pushed the US Dollar Index (DXY) from last year’s low of around 97.00 to its current value of 104.50. In the UK, the economic outlook has weakened. The Bank of England is dealing with inflation that has fallen to 2.1%, comfortably within its target. This difference in monetary policies— a hawkish Fed versus a potentially dovish Bank of England—creates a bearish outlook for GBP/USD. The pair has dropped from 1.3690 last year to around 1.2750 today. In the upcoming weeks, consider buying GBP/USD put options to prepare for potential further declines while managing risk. With the pair under key psychological levels, look at strikes near 1.2600 and 1.2500 expiring after the next central bank meetings. This strategy benefits if the spot price falls and market volatility increases. Another option is to take short positions in GBP/USD futures for more direct exposure. We should watch for a strong break below recent support at 1.2700 to add to these positions. The technical resistance from last year near 1.3700 is now a distant memory, with sellers firmly in control. We need to stay focused on the upcoming inflation and employment data from both the US and the UK. Any unexpected strength in UK data could result in a short-term rally. However, the ongoing policy differences suggest a weaker Pound Sterling. The upcoming FOMC meeting will be crucial for confirming the Fed’s commitment to its current stance. Create your live VT Markets account and start trading now.

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