The Pound Sterling (GBP) has dropped 0.1% against the US Dollar (USD), continuing a slight decline from its recent peak. This change comes as GBP fundamentals weaken due to tighter UK-US yield spreads and is shaped by current market sentiment and risk reversals.

Inflation Expectations

Recent data on UK inflation expectations shows figures mostly as predicted, in the mid to lower 3% range. The Pound’s rise since November appears to have stalled, fluctuating between 1.3400 and 1.3550. The bullish momentum is fading, with the Relative Strength Index (RSI) staying above 50, indicating a neutral stance. The 200-day moving average stands at 1.3390, with short-term movements expected to range between 1.3400 and 1.3500. In late 2025, the Pound’s rally got stuck in a narrow range between 1.3400 and 1.3550. This consolidation period recently ended with a downturn. Warning signs like the RSI dropping from overbought levels signaled the loss of bullish momentum. The cause of the decline, which was a soft signal back then, is now clearer. The gap between UK and US yield spreads has narrowed quickly, influenced by recent economic data. For example, the US Non-Farm Payrolls report for December 2025 showed a strong addition of 210,000 jobs, while the UK’s Q4 2025 GDP growth was confirmed at just 0.1%. This economic divergence is putting pressure on the Bank of England. They face high inflation (3.8% CPI) and a weakening economy. The market now expects the US Federal Reserve to keep rates steady longer than the BoE will. As a result, GBP/USD is struggling to maintain ground around the 1.2900 mark.

Market Strategies and Outlook

In the coming weeks, this environment suggests that volatility may be mispriced. Derivative traders might consider strategies that take advantage of price movements since central bank comments can lead to sharp changes. Buying straddles or strangles could be smart for positioning ahead of significant market swings, no matter which way they go. Those who expect the Pound to weaken should think about buying put options to limit risk while benefiting from further declines. Selling out-of-the-money call spreads could also be a good way to earn premium, based on the belief that any future rallies will likely be capped around the 1.3000 level. Currently, we are watching the 1.2850 level for important support. Create your live VT Markets account and start trading now.

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