The Pound Sterling (GBP) is recovering well, trading at about 1.3465 against the US Dollar (USD) during the European trading session on Monday. This bounce back comes after the GBP/USD pair opened lower at around 1.3390. The initial dip was influenced by a significant drop in the US Dollar due to a criminal investigation involving Federal Reserve Chair Jerome Powell. The US Dollar Index (DXY), which measures how the USD compares to six major currencies, fell by 0.3% and is now near 98.80. It had recently hit a monthly high of about 99.25 but has pulled back.

Economic Projections For GBP

Despite the lack of downward momentum, the Pound Sterling (GBP) might still be tested at the key support level of 1.3370. Analysts from UOB Group believe that the GBP could decrease to 1.3370 and possibly even 1.3340 over time. Last Thursday, the GBP dropped to a low of 1.3418. During the Asian session on Friday, early signs suggested a possible retest of the 1.3420 level, but a major threat to the support level at 1.3400 seemed unlikely. The investigation into the Fed Chair has created uncertainty, leading to a sharp dip in the dollar and a recovery in the pound. This change is evident in the options market, where one-month implied volatility for GBP/USD has jumped to nearly 14%, up from an average of 8% last month. This means traders should get ready for bigger price fluctuations in the coming weeks. While technical analysis points to a potential drop towards 1.3370, this new development could change everything. For those who think this dollar weakness is just a temporary reaction, buying put options with a strike near 1.3400 could be a good way to prepare for a downturn. This approach can safeguard investments if the investigation resolves quickly and the dollar regains strength.

Potential Market Strategies

On the flip side, the pound may rise, particularly since last week’s UK inflation data showed a steady 3.8%, increasing pressure on the Bank of England. If the dollar stays weak for a while, we could test the 1.3500 level sooner than expected. Therefore, it’s wise to consider buying call options that expire in late February. Looking back from 2025, we were often reminded of the dollar’s strength during previous rate hikes. This established trend makes today’s sudden political shift a big surprise. Recent CFTC data revealed that large speculators were betting on dollar strength, so this current pressure on their positions may continue. Given the tension between bearish technicals and bullish fundamentals, a neutral strategy could be the best choice. We recommend a long strangle strategy, which involves buying both an out-of-the-money call and an out-of-the-money put option. This method will become profitable if the pound moves decisively up or down, which seems likely now. Create your live VT Markets account and start trading now.

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