GBP/USD is staying below 1.3800 as the Federal Reserve decided to keep interest rates steady, with a vote of 10-2. Initial concerns were raised due to some dissenting opinions, but a solid labor market boosted the Dollar. Traders are now looking forward to Fed Chair Jerome Powell’s press conference for clues about future policy directions in 2026. After the Fed chose to maintain rates at 3.50%–3.75%, GBP/USD moved within the 1.3740-1.3790 range. While two Fed Governors wanted a rate cut, their views were overshadowed by the overall stability narrative. Investors will be keen to hear Powell’s insights on future policy.

The Fed’s Monetary Policy Tools

The Federal Reserve stressed the importance of maintaining price stability and full employment. They noted that inflation is still “somewhat elevated” and acknowledged a stable labor market, indicating a complicated economic outlook. The Fed holds eight meetings each year to review economic conditions and make decisions through the Federal Open Market Committee. In extraordinary situations, the Fed uses quantitative easing (QE) and quantitative tightening (QT) to influence monetary policy. QE includes buying bonds to increase liquidity, which can weaken the US Dollar. In contrast, QT reduces bond purchases and can strengthen the Dollar. The Fed’s decision with a 10-2 split has led to much uncertainty, contributing to GBP/USD’s struggle below the 1.3800 resistance level. This disagreement within the Fed suggests that volatility may increase soon. Traders should prepare for a potential price move once Powell shares more details about the 2026 policy path. The Fed’s caution is also justified. The latest core CPI report from early January showed inflation at 3.1%, still above the 2% target. Additionally, a stable labor market was indicated by the December 2025 non-farm payrolls, which added 175,000 jobs. The stable 4.0% unemployment rate allows the Fed to wait for more data before considering a rate cut.

Strategic Positioning for Traders

Given the current uncertainty, it’s wiser to wait for a breakout rather than take a strong position before Powell’s comments. A long straddle on GBP/USD—buying both a call and a put option—could be a smart strategy. This approach would benefit from a big price movement in either direction after the press conference. The weakness of the Sterling is also important, limiting its ability to react positively to the Fed’s dovish dissenters. Recent UK retail sales data for December 2025 showed an unexpected drop of 0.5%, raising worries about the strength of British consumers and making it harder for the pound to rise above the 1.3800 level. We recall the sharp dollar rise in the latter half of 2025 when the Fed indicated it would maintain higher rates longer than expected. Thus, any hedges using put options to guard against a sudden decrease in GBP/USD should remain in place. A surprisingly hawkish tone from Powell could quickly reverse the market’s initial dovish response to the split vote. Create your live VT Markets account and start trading now.

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