GBP/USD dipped slightly to around 1.3430 after President Trump eased tariff threats, which improved market sentiment. Meanwhile, UK inflation rose to 3.4% in December, exceeding expectations, but weaker employment data kept the possibility of Bank of England policy easing alive.

Geopolitical Developments

Market interest shifted to geopolitical events, especially after Trump’s comments at Davos, making economic data secondary. US Pending Home Sales decreased by 9.3% in December, while UK inflation edged higher than expected. Despite this inflation rise, expectations for a Bank of England rate cut remain unchanged, with markets anticipating 47 basis points of easing by year-end. The concerning employment numbers from the ONS might nudge the BoE toward lowering rates. The GBP has traded in a narrow range against the USD, supported by the 200-day and 20-day SMAs, as the Dollar recovers from earlier losses. Key technical levels to watch include the 20-day SMA at 1.3455 and support at 1.3338. The Pound Sterling is a major global currency, influenced by Bank of England policies, economic indicators like GDP and trade balance, and foreign exchange dynamics. It ranks as the fourth most traded currency worldwide, with significant pairs including GBP/USD, GBP/JPY, and EUR/GBP.

Market Consolidation and Strategy

GBP/USD is currently consolidating in a tight range, defined by the 200-day moving average around 1.3403 and the 20-day average near 1.3455. This sideways movement shows the market’s uncertainty, balancing the stronger-than-expected UK inflation against ongoing expectations of Bank of England rate cuts. Recent weak job data seems to weigh more heavily, sustaining easing expectations. Attention now turns to the upcoming US Gross Domestic Product and PCE inflation data. These releases will be critical for breaking the current stalemate for the dollar and, consequently, for the pound. In 2025, the Dollar Index typically moved an average of 0.4% in the four hours following the core PCE release, highlighting its significance for short-term currency trends. In light of this anticipated volatility, traders might consider a strangle strategy, buying both an out-of-the-money call and put option. This approach aims to profit from a significant price move in either direction after the US data release, without needing to predict the outcome accurately. The cost of the options represents the maximum risk, offering a defined-risk way to trade this event. Alternatively, those who expect the pair to remain range-bound *before* the data release might find selling an iron condor with short-term expiry appealing. This strategy involves selling a call spread and a put spread, benefiting from time decay as long as GBP/USD stays between the sold strike prices. This strategy carries higher risk, relying on continued low volatility ahead of crucial news. For longer-term positions, investors should still consider the 47 basis points of Bank of England rate cuts expected this year. A similar situation occurred in early 2024 when the market aggressively priced in BoE cuts that were later reduced, resulting in a sharp rally for Sterling. If the recent 3.4% inflation is a sign of a more persistent trend, buying longer-dated call options could be a way to position for a repricing that could elevate GBP/USD later this year. Create your live VT Markets account and start trading now.

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