**GBP/USD Outlook** GBP/USD has risen to about 1.3685 in the early European session on Tuesday. The Pound is gaining against the US Dollar due to stronger UK Retail Sales and PMI data. The current RSI shows the currency pair is overbought, indicating a possible pause in its upward movement. Key support is at 1.3480. Worries about the Federal Reserve’s independence and a potential US government shutdown are putting pressure on the US Dollar. The Fed is expected to keep interest rates steady in their upcoming meeting after making three cuts by the end of 2025. If Fed officials make any hawkish remarks, it might help the US Dollar. From a technical perspective, GBP/USD is trading above the 100-day EMA at 1.3385, keeping a bullish outlook with an RSI of 72. Immediate resistance is at the upper Bollinger Band at 1.3656, while initial support is at the 20-day middle band at 1.3480. The Pound Sterling is the oldest currency globally and plays a crucial role in foreign exchange, representing 12% of global transactions. Its value is shaped by the Bank of England’s monetary policies and economic data like GDP and PMI. A positive trade balance also boosts the currency’s strength. **Market Dynamics** Last year, the Pound strengthened towards 1.37, driven by solid UK economic reports. This strength was based on the belief that the Bank of England would delay any interest rate cuts. However, an overbought RSI suggested that the rally might not last. That optimism has diminished as the economic outlook has become murkier. UK inflation for December 2025 was at 3.1%, lower than its peak but still above the Bank of England’s 2% target. Additionally, the first estimate for Q4 2025 GDP showed only 0.1% growth, indicating stagnation in the economy due to high rates. On the US side, concerns from late 2025 have calmed somewhat. The Federal Reserve kept interest rates steady earlier this month, with firmer commentary than expected. The latest Non-Farm Payrolls report revealed a solid addition of 215,000 jobs, indicating the US economy’s ongoing strength. The overbought signal when GBP/USD was above 1.3650 proved to be a crucial warning. Now trading around 1.3420, we think it’s wise to sell rallies. Using any increase towards the old support level of 1.3480 to buy puts or sell call spreads might be a smart strategy in the coming weeks. Volatility is another important factor in our positioning. Implied volatility for GBP/USD has decreased from December’s highs, with 1-month volatility around 7.2%, compared to historical averages of about 9% during uncertain times. This decline allows for cheaper option purchases, providing a defined-risk method to prepare for a potential drop below the previously mentioned 1.3385 support level. Create your live VT Markets account and start trading now.

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