The Pound Sterling is trading carefully as important UK data and the Bank of England’s (BoE) monetary policy decision approach. This Thursday, the BoE is expected to lower interest rates by 25 basis points to 3.75%. Key UK unemployment and inflation data will be released before this decision.

Pound Sterling Stability

Right now, the Pound Sterling is stable against major currencies. However, it might become more volatile with new economic data and the expected rate cut from the BoE. The UK’s core inflation for November is forecasted to stay at 3.4%, while the labor market data indicates rising unemployment. On Monday, the Pound Sterling rose to about 1.3385 against the US Dollar. This increase happened as the US Dollar hit an eight-week low ahead of important US employment data. The Federal Reserve recently lowered rates due to a weak labor market. Investors will also pay attention to US Retail Sales for October and the PMI data for December. There are market expectations for future rate cuts from the Fed, which differ from last week’s forecast. The technical outlook shows GBP/USD trading around 1.3385, and trends remain positive as long as it stays above the 20-day EMA. If resistance breaks, the Pound could gain even more. This week is crucial for the Pound Sterling, with everyone’s focus on the Bank of England’s interest rate decision on Thursday. The general opinion is for a cut of 25 basis points to 3.75%, marking the first reduction in this cycle. Before that, we will see important UK inflation and employment data that could influence the outcome. The push for a rate cut is growing, as core inflation has decreased to 3.4% from the high levels over 10% seen in 2022. The unemployment rate in the UK has also risen to 4.4% in the latest report, indicating a weaker job market. These stats give the Bank of England a reason to ease monetary policy.

Market Strategy Considerations

For derivatives traders, the current situation indicates rising implied volatility in the days ahead. Making large directional bets on the Pound before Wednesday’s inflation data is risky due to the uncertain outcome. Strategies like straddles or strangles on GBP pairs could be used to benefit from expected price swings, regardless of the direction. The outlook for GBP/USD is complicated by the weak US Dollar, which is trading near an eight-week low. Tomorrow, we expect the US Nonfarm Payrolls report, following last month’s disappointing addition of 160,000 jobs. This trend is raising market bets that the Federal Reserve will need to cut rates sooner than expected. There is a clear gap between market expectations and official guidance from the US central bank. The CME FedWatch Tool currently indicates a nearly 80% chance of a Fed rate cut by March 2026, even though the Fed suggests only one more cut this year. This aggressive market sentiment is putting pressure on the US Dollar, benefiting GBP/USD in the meantime. Technically, GBP/USD is showing positive signs as it tests the 1.3400 level. A break above 1.3395 could lead to a move towards 1.3488, especially if US data is weak. Traders might consider buying short-dated call options with a strike above 1.3400 to take advantage of a potential breakout. Create your live VT Markets account and start trading now.

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