The Pound Sterling is doing better than many volatile currencies, but it’s facing challenges from safe-haven currencies. This change comes as more people seek safer investments following a US raid in Venezuela. The Bank of England plans to gradually lower interest rates by 2026, recently cutting them to 3.75%.

Inflation Dynamics

UK inflation has been easing but still stands above the target at 3.2% in November, down from a peak of 3.8% in September. The Pound Sterling has fluctuated in the currency markets, dropping by 0.2% against the US Dollar to around 1.3420. The US Dollar Index has climbed to 98.80 amid market worries from geopolitical events. Furthermore, the Federal Reserve has made three interest rate cuts to support the job market. Investors are awaiting economic data, as the US ISM Manufacturing PMI is expected to show a slight increase from last month. Technical analysis shows the GBP/USD exchange rate at 1.3427, indicating a short-term upward trend. Key levels to monitor are the resistance at 1.3491 (61.8% Fibonacci retracement) and support at 1.3399 (50% retracement). The market’s overall risk sentiment affects currency performance based on perceived risks. The situation in Venezuela is creating a risk-off environment, leading investors to favor the safety of the US dollar. This trend is directly impacting the Pound, which is struggling against the dollar but is relatively stable compared to other currencies. The flight to safety has been a primary theme as the week begins.

Bank of England Strategy

We believe the Bank of England’s actions at the end of 2025 are positively impacting the Sterling. The choice to gradually cut rates contrasts with the more aggressive easing seen elsewhere. December 2025 UK inflation data showed core prices remained above 3%, making the BoE cautious about quick rate cuts, which helps keep the Pound stronger against currencies like the Euro. This week, all eyes will be on the US jobs report for December, a critical event. The Federal Reserve’s rate cuts in 2025 were responses to a slowing labor market, with only 165,000 jobs added on average in the last quarter. A weak Nonfarm Payrolls report on Friday could hinder the dollar’s rise by sparking more expectations for Fed easing. With ongoing geopolitical tensions and upcoming US data, we expect increased currency volatility. Traders should be aware that implied volatility for GBP/USD options expiring after Friday’s jobs report is likely to be high. This environment may be advantageous for strategies capitalizing on sharp price movements. On the charts, the 1.3500 level is crucial for GBP/USD. If it fails to break through this resistance in the current risk-averse climate, it could signal a good time to consider bearish positions targeting support around 1.3400. A drop below this level would indicate that the recent upward trend may be stalling. It’s essential to assess Sterling’s relative performance, as it is outpacing its riskier counterparts. While buying GBP/USD may be tough now, pairing the Pound with commodity-linked currencies like the Australian or New Zealand dollar could be a smart move. Historically, during risk-off events like the early 2020 shock, these commodity currencies have lagged behind Sterling. Create your live VT Markets account and start trading now.

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