The GBP/USD pair rose after UK employment grew by 82,000 in the three months to November, recovering from a previous drop of 17,000. Traders are now looking forward to the UK’s December CPI, PPI, and Retail Price Index data, which will be released later on Wednesday. Currently, GBP/USD is trading at about 1.3430, showing gains for the third session in a row. Average earnings, excluding bonuses, rose by 4.5% compared to last year, while earnings that include bonuses increased by 4.7%. The unemployment rate held steady at 5.1%, missing the anticipated drop to 5.0%.

US Dollar Weakens

The US dollar is weakening amid concerns over trade with Greenland. US President Trump has reiterated his interest in Greenland and threatened a 200% tariff on French wines, raising fears about economic growth. At the same time, the European Parliament is ready to announce a decision on halting the approval of a US trade deal that was agreed upon in July. To understand the Pound Sterling’s movements, we need to consider the data releases that impact its value. The Bank of England (BoE) adjusts monetary policy through interest rates to keep inflation around 2%. A strong economy typically supports the GBP, while weak economic indicators can lead to a drop. The Trade Balance is also important; a positive net balance strengthens the currency. The GBP/USD is currently stable, but the trading environment is different from the tumultuous trade disputes during the Trump era. Back then, the pair traded near 1.3450, a substantial difference from today’s rate of about 1.2780. The main factors affecting the pair remain consistent: UK economic data versus the strength of the US dollar. Looking back at 2025, the Bank of England faced persistent inflation that refused to return to its 2% target. The December 2025 CPI was recorded at 3.8%, significantly above expectations, putting pressure on the Bank to keep a hawkish approach. In contrast, the unemployment rate has shifted from 5.1% years ago to a tighter 4.1% in Q4 2025, which is driving wage growth.

Interest Rate Implications

This ongoing inflation pressure suggests the Bank of England may not be able to cut interest rates in the first half of this year. For derivative traders, this means likely increasing volatility for the pound in the upcoming weeks, especially during the February Monetary Policy Committee meeting. Considering strategies like buying straddles or strangles on GBP/USD could help benefit from significant price moves in either direction as market expectations for rate cuts change. On the US side, the dollar faces challenges from renewed trade disputes, particularly concerning digital service taxes with various European nations. This trend mirrors the arbitrary tariff threats from the past, adding risk and weakening the dollar against other major currencies. The CBOE Volatility Index (VIX) has risen from a low of 12.4 in late 2025 to over 14.1 this month, indicating growing geopolitical uncertainty. With strong support for a higher pound due to BoE policy expectations, paired with the geopolitical issues facing the dollar, it makes sense to have a bullish outlook on GBP/USD. We should consider buying call options expiring in March or April to take advantage of potential gains. A more cost-effective method could be to use a bull call spread, which may limit potential profits but significantly reduces the upfront premium. However, we should be cautious about the UK consumer’s health. Retail sales data for Q4 2025 showed a worrying contraction of 0.8%. This weakness might lead the Bank of England to pause or adopt a more dovish stance, which could hurt the pound’s strength. Therefore, any long positions should come with a solid risk-management strategy. Create your live VT Markets account and start trading now.

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