The Pound Sterling is gaining strength against the US Dollar during Tuesday’s North American session. A rise in trade tariffs is weakening the Dollar, pushing GBP/USD to 1.3776, an increase of 0.76%. The pair has reached new six-month highs due to the Dollar’s overall decline. Currently, GBP/USD is around 1.3739, up nearly 0.42% for the day.

GBP vs. Dollar: Challenges Ahead

Even with this increase, the GBP/USD pair struggles to stay above the 1.3700 level. It dipped briefly during the European session but remains stable above the mid-1.3600s. The Pound is hitting six-month highs against the Dollar, mainly due to rising trade tariff concerns that are impacting the US currency. With the Federal Reserve’s first meeting of the year approaching, this trend may continue. The focus now is on whether GBP/USD can maintain its gains above 1.3700. This movement isn’t solely due to Dollar weakness; the Pound is also showing its own strength. Looking back to late 2025, UK’s core inflation remained high, with the Q4 consumer price index at 3.1%, well above the Bank of England’s target. This suggests that the Bank of England may be slower to cut rates than the Fed, which supports the Pound. The combination of trade uncertainty and the upcoming Fed decision is increasing expectations of volatility. One-month implied volatility for GBP/USD options has reached its highest level since the market fluctuations seen in Q3 of 2025. This makes buying options more costly, but also allows for larger premiums for those willing to sell.

Risk and Strategy Considerations

Given the upward trend, we should consider strategies that benefit from further rises while managing risk amid high volatility. Bull call spreads with February expirations—such as buying the 1.3800 strike and selling the 1.3950 strike—could effectively target additional gains. This strategy limits our risk while reducing the cost of entry compared to an outright long call. For those who believe the downside is minimal, the high premiums make selling cash-secured puts an appealing income strategy. Given that the pair is finding support in the mid-1.3600s, selling a put around the 1.3600 strike could allow premium collection while waiting for the market to decide its next significant move. This takes advantage of the current high implied volatility. However, we must stay vigilant. A similar situation occurred during the trade disputes of 2019 when Dollar weakness quickly reversed after a stronger-than-expected Fed statement. A hawkish tone from the Fed aimed at countering inflation from tariffs could halt this rally suddenly. Thus, maintaining defined-risk positions as we approach the central bank meeting is a wise strategy. Create your live VT Markets account and start trading now.

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