The Pound Sterling is facing difficulties against the US Dollar, trading close to a four-week low of 1.3360. This is largely due to expectations that the Federal Reserve will pause its monetary easing, keeping the US Dollar strong, with its index nearing a six-week high.

Fed Policy Expectations

Traders believe the Fed will keep interest rates between 3.50% and 3.75% in January. These expectations stem from ongoing price pressures in the US and comments by Kansas City Fed Bank President Jeffrey Schmid, who supports a tight monetary policy. Next week, the UK’s employment and Consumer Price Index data will be released. These figures will provide insights into how the Bank of England may approach its monetary policy. Technical analysis indicates the GBP/USD pair might hit resistance at 1.3401, with soft momentum reflected by the 14-day RSI at 46. The Pound Sterling accounts for about 12% of global forex transactions and is mainly influenced by the Bank of England’s policies. Economic indicators like GDP and trade balance are essential in determining the strength of the Sterling, with a positive trade balance typically benefiting the currency. The Pound is not performing well against the US Dollar, and we expect this trend to continue in the near future. Recent data showed the US economy added a robust 210,000 jobs in December 2025, and consumer inflation remains an issue at 3.4%. This situation leaves little room for the Federal Reserve to ease its policy, making the dollar attractive.

UK Economic Data Focus

Attention is now on the upcoming UK employment and inflation data. Remember that by late 2025, UK inflation was still high at 4.5%. This places the Bank of England in a tough spot as economic growth stalls, creating significant pressure on the Pound and giving the Dollar an advantage. For derivative traders, this suggests they may want to position for a further decline in the GBP/USD pair. Buying put options with strike prices below the current 1.3360 level could be a smart move, particularly as the pair struggles to rise above resistance near 1.3400. The implied volatility leading up to next week’s data release makes options a valuable tool for managing risk. However, there is a risk that UK inflation could come in higher than expected, which might push the Bank of England to take a more assertive stance, causing the Pound to rise sharply. Traders anticipating significant movement but unsure of the direction might consider a long straddle, purchasing both a call and a put option to profit from a large price shift. It’s important to remember the lessons we learned during the high inflation period of 2022-2023. Central banks are now very cautious about declaring victory over inflation too soon and will likely require strong evidence before shifting their restrictive policies. This context suggests that the US Dollar will likely remain strong, continuing to pressure the Pound. Create your live VT Markets account and start trading now.

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