GBP/USD is holding steady around 1.3450, even after a dip following the US Consumer Price Index (CPI) release, which showed a drop in core inflation. This news has raised hopes for possible Federal Reserve interest rate cuts in 2026, but no cuts are anticipated in January due to ongoing political tensions. In December, the US CPI increased by 0.3% from the previous month, matching the annual rise of 2.7% seen in November. Core CPI held at 0.2% month-on-month but slightly missed expectations, coming in at 2.6% instead of the anticipated 2.7%. Market participants now expect nearly 50 basis points of interest rate cuts by the Fed toward the end of 2026.

Potential Economic Growth

The President of the St. Louis Fed highlighted potential economic growth above expectations and expressed ongoing support for rate cuts if necessary. Meanwhile, traders in the UK are looking forward to GDP figures, which are expected to remain unchanged at 0%, potentially improving from October’s downturn. Key upcoming US data includes the Producer Price Index and Retail Sales figures. In currency performance, the British Pound was the strongest against the Japanese Yen, gaining 0.94% against it. The Pound also saw gains against other main currencies, while the Japanese Yen remained weak across the board. With core inflation now below 3% at 2.6%, we observe a notable shift from the persistent price pressures of 2025. This trend reinforces expectations for Federal Reserve rate cuts later this year, making bearish strategies on the US Dollar more appealing. Traders may consider buying puts on the Dollar Index (DXY) to prepare for potential weakness.

Currency and Economic Dynamics

On the other side, the British Pound is grappling with challenges from a stagnant domestic economy. The upcoming GDP data is crucial, especially after a sluggish 2025 that mirrored the minimal 0.1% annual growth seen in 2023. A negative GDP report could easily push GBP/USD below its support levels, making short-dated puts on Sterling an effective hedge. Currently, GBP/USD is consolidating in a tight range, often a precursor to significant price movements. This could lead to a rise in implied volatility for short-term options ahead of key data from both the UK and US this week. This setup suggests a straddle strategy, where we could buy both a call and a put option to profit from a large move in either direction. We should closely monitor the 1.3500 level as a trigger for bullish strategies, such as buying call options aimed at this year’s high. On the flip side, a confirmed break below the 200-day moving average near 1.3388 could signal further decline. This would indicate a good time to start bearish positions or buy puts to safeguard long holdings. Create your live VT Markets account and start trading now.

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