**GBP/USD Eyes Bearish Reversal** **The Federal Reserve’s Anticipated Rate Decision** GBP/USD dropped after four days of gains, trading close to 1.3800 during Friday’s Asian session. Technical analysis shows a potential bearish reversal, suggesting that buyer momentum is weakening within a rising wedge pattern. The pair is still above the nine-day and 50-day Exponential Moving Averages (EMA), which indicates a positive outlook. The short-term average rising above the medium-term one strengthens the trend, suggesting that any price dips might be temporary as long as it respects the rising averages. GBP/USD is on track for a second week of gains as the US Dollar weakens due to trade war talks. The Pound Sterling could end the month with gains for the third consecutive time against the US Dollar, hitting multi-year highs. The Federal Reserve will announce its first rate decision of the year on Wednesday, and no changes are expected. Attention will focus on possible future rate cuts, with futures markets predicting two quarter-point cuts by the end of 2026. Currently, GBP/USD is at 1.3776, up 0.76% after reaching a four-year high of 1.3791. The US Dollar is losing appeal as positive sentiment grows, with President Trump expected to increase tariff threats against South Korea. With GBP/USD testing four-year highs around 1.3800, the current momentum suggests a bullish outlook. The main driver is the weakness of the US Dollar, fueled by renewed trade rhetoric. We may consider buying near-term call options to take advantage of a possible breakout toward 1.3900 or higher. The dollar’s decline is backed by recent fundamentals. Late 2025 data revealed an unexpected widening of the US trade deficit. These trade tensions, particularly threats of increased tariffs on South Korea, are likely to keep the dollar under pressure as we approach the Federal Reserve meeting. Past trade disputes in 2025 have led to significant dollar underperformance against other major currencies. All eyes will be on the Fed’s forward guidance this Wednesday, as markets are already anticipating future easing. The CME FedWatch Tool currently indicates over a 75% chance of the first rate cut by June 2026. This outlook contrasts sharply with the Bank of England, which, in its December 2025 meeting, signaled it would maintain rates steady with UK inflation at 3.1%. This difference in policy makes long Pound positions appealing against the dollar. We see it as a chance to sell out-of-the-money put options on GBP/USD, earning premium based on the expectation that the pair will remain supported above levels like the 50-day EMA. The strong trend suggests that price dips may be quickly bought. However, we should consider technical warnings from the rising wedge pattern that may indicate buyer exhaustion. This means buying put options with a strike price below 1.3700 could be a smart hedge against a quick reversal, especially if the Fed gives a surprisingly hawkish statement. A drop below the nine-day EMA would signal that upward momentum is weakening. Due to the high-impact nature of the Fed meeting, implied volatility is expected to rise. This creates an opportunity for a long volatility strategy, such as a straddle, which involves buying both a call and a put option at the same strike price. This strategy would profit from a significant price movement in either direction after the central bank’s announcement. Create your live VT Markets account and start trading now.

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