The GBP/USD pair gained momentum, bouncing back from a recent decline as the US Dollar weakened. Concerns about the US Federal Reserve’s independence led to a drop in the USD, despite ongoing global tensions and a push for safe investments. The currency pair found buyers close to the 200-day Simple Moving Average, recovering from a near three-week low. Prices increased to about 1.3435, marking a 0.20% rise for the day and breaking a four-day losing streak.

US Dollar Weakness Due to Fed Concerns

Even though expectations for aggressive easing of US Federal Reserve policies have decreased, the US Dollar continues to weaken. This has positively impacted GBP/USD. Recently, the USD Index fell from its peak ahead of December’s Nonfarm Payrolls report, which showed only 50K jobs added, falling short of expectations despite a drop in the unemployment rate to 4.4%. Anticipated rate cuts by the Bank of England in 2026 may limit gains for GBP/USD. Traders are looking forward to US inflation data and UK GDP figures later in the week for clearer market direction. The USD showed mixed performance against other currencies, particularly being stronger against the Japanese Yen. The GBP/USD pair is currently finding support near its 200-day moving average, which is an important technical level, after a four-day decline. This rebound into the mid-1.3400 range is mainly due to the overall weakness of the US Dollar. The dollar sell-off stems from serious concerns regarding the Department of Justice’s threats against Fed Chair Powell, which challenges the central bank’s independence. This political uncertainty surrounding the Fed creates volatility, affecting trader strategies. The Dollar Index (DXY) dropped from over 104.50 last Friday to around 103.20, reflecting market worries. In light of this, we might see increased implied volatility in major dollar pairs, making strategies like straddles on USD/JPY or strangles on EUR/USD appealing for potential price shifts.

Market Effects of Fed Political Pressure

This situation is reminiscent of the political pressures the Fed encountered in 2018 and 2019, which caused significant market fluctuations. Back then, worries about the Fed yielding to political influence led to notable swings in treasury yields and the dollar. The current threat of a criminal indictment is a more serious concern, suggesting that we may face even greater market volatility in the coming weeks. However, the British Pound also faces challenges that may limit its rally. Recent data from late 2025 indicates UK inflation cooled to 2.8%, with GDP growth at just 0.1%. The market is reflecting expectations of at least two interest rate cuts from the Bank of England this year. This difference in monetary policy may keep GBP/USD from breaking above the 1.3600 resistance level. As a result, we should pay close attention to key data releases this week, especially the US inflation reports on Tuesday and Wednesday. A higher-than-expected US CPI could renew dollar strength and complicate the current narrative, while a lower number might reinforce it. Considering the limited upside for the Pound, traders might look into buying GBP/USD call spreads, such as purchasing a 1.3500 call and selling a 1.3650 call, to profit from a modest upward move while controlling risk. Create your live VT Markets account and start trading now.

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