GBP/USD stands at about 1.3760, down around 0.30% on Friday. The US Dollar is gaining strength as the US Senate works on a spending deal to avoid a government shutdown, reducing political uncertainty. President Trump and Senate Democrats have reached an agreement, allowing funding legislation to move forward. This eases fiscal worries and provides support for the US Dollar, which has faced pressure recently.

Federal Reserve Chair Nominee Decision

All eyes are on Donald Trump’s upcoming choice for a Federal Reserve Chair nominee, with Kevin Warsh considered a potential pick. Warsh’s support for central bank independence might limit risks for the US Dollar. The Pound Sterling is struggling to make gains even in a stable risk environment. Traders are cautious ahead of the US Producer Price Index, which could offer clues about inflation and US monetary policy. Anticipation is building for the Bank of England’s meeting, where the policy rate is expected to remain at 3.75% following a previous cut. Analysts believe there won’t be any rate reduction until mid-next year, which limits the growth of the Pound Sterling against the US Dollar. Currently, the British Pound performs best against the Japanese Yen. The currency heat map summarizes the percentage changes of major currencies relative to one another. Reflecting on the end of 2025, we saw a similar trend where US dollar strength pressured the pound. Today, with GBP/USD around 1.2520, the situation feels reminiscent as we head into February 2026. Dynamics from last year, driven by US political stability and caution from the Bank of England, seem to be repeating.

Policy Divergence and Its Impact

The US dollar is gaining support again, much like after Congress passed a spending agreement in late 2025 to prevent a shutdown. Recent data shows US Core PCE inflation steady at 2.8% for December 2025, reinforcing the idea that the Federal Reserve will be slow to cut interest rates. This is a sharp contrast to last year, when markets expected more aggressive action from the Fed. On the other side, the Bank of England is indicating a more dovish approach, similar to its stance in 2025. With UK GDP growth only at 0.2% in the fourth quarter of last year, the BoE is widely predicted to be one of the first major central banks to cut rates in the second quarter of 2026. This difference in policy is a significant burden on the pound. For derivative traders, this scenario suggests it might be a good time to consider bearish strategies on GBP/USD. Buying put options with strike prices around 1.2400 or 1.2350 for March 2026 expiry could be a way to profit from a continued decline. This allows traders to take advantage of the expected policy differences between the US and the UK. However, we should keep an eye on upcoming US economic data, especially the January jobs report due next week. A surprisingly weak report could quickly shift expectations for Fed policy, reversing the dollar’s recent strength. This remains the main risk for those holding a short position on the pound against the dollar. Create your live VT Markets account and start trading now.

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