The Pound Sterling dropped below 1.3800 after Kevin Warsh was nominated to lead the Federal Reserve. A strong US Producer Price Index (PPI) report also helped boost the US Dollar. On Friday, GBP/USD traded around 1.3760, losing 0.30% as the USD gained strength when the US Senate moved forward on a spending deal to avoid a government shutdown, reducing political uncertainty. During the early European session on Friday, sellers emerged around 1.3760. The US Dollar rose after an agreement between President Donald Trump and Senate Democrats to prevent a shutdown was announced. The market was waiting for the US PPI data later that day for more insights.

Impacts on Cryptocurrency and Gold

Following this news, EUR/USD dropped below 1.1900, as the USD gained momentum after Warsh’s nomination and higher-than-expected producer prices in December. Additionally, Bitcoin, Ethereum, and Ripple experienced significant losses. Bitcoin neared its November low of $80,000, while Ethereum fell below $2,800 due to increasing bearish sentiment. On the other hand, Gold managed to hold above the $5,000 level, despite broad profit-taking in commodities and a strong US Dollar. We recall the market volatility in 2025 when a hawkish Federal Reserve nomination sent the US dollar soaring, negatively impacting assets across the board. The Pound Sterling’s sharp decline below 1.3800 was a clear signal of how quickly market sentiment can shift. This event demonstrated that sudden changes in Fed policy expectations lead to increased volatility. As of late January 2026, the market appears to be overlooking these lessons, with derivatives anticipating multiple interest rate cuts this year. However, recent data indicates that US core inflation remains high, around 3.2%, well above the Fed’s target. This creates a troubling disconnect, similar to the conditions before last year’s sell-off. For traders watching GBP/USD, the pair is currently more vulnerable than it was back then. UK inflation has decreased but is still elevated at 4.0% according to the latest readings, limiting the Bank of England’s ability to support the economy. Given that the US economy is showing more strength, any hawkish surprises from the Fed could easily push the pound below important support levels around 1.2700.

Hedging Strategies for Traders

This scenario suggests that derivative traders should think about hedging against a quick appreciation of the US dollar. With the CBOE Volatility Index (VIX) sitting low at 13.5, options premiums are relatively inexpensive, providing a cost-effective way to guard against a sudden market downturn. Buying put options on currency pairs like GBP/USD or major stock indices might be a wise choice in the coming weeks. We also witnessed last year how a rising dollar led to a historic decline in metals and cryptocurrencies. Gold fell from its peaks, and Bitcoin sharply retreated from the $80,000 mark. This highlights that holding long positions in these alternative assets carries considerable risk if the Fed indicates a longer duration of higher rates. Create your live VT Markets account and start trading now.

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