Outlook For Sterling
With the GBP/USD pair breaking below the 1.3350 mark, we should anticipate further weakness for the pound in the coming weeks. The surge in oil prices combined with a strong US dollar creates a difficult environment for sterling. This suggests positioning for more downside is the logical path forward. The Federal Reserve’s stance is a primary driver, as markets are now pricing in zero rate cuts for 2026, a significant shift from just a month ago. Recent US inflation data supports this, with the core Consumer Price Index for February coming in at a stubborn 3.4%, reinforcing the Fed’s “higher for longer” narrative. We remember how delayed the Fed’s response was back in 2022, and it seems they are keen not to repeat that policy error. Geopolitical tensions are directly fueling this dollar strength while simultaneously hurting the UK. With Brent crude now holding above $110 a barrel, the UK’s latest Current Account data for Q4 2025 showed a deficit of £21.2 billion, highlighting its vulnerability as a net energy importer. This leaves the Bank of England trapped between fighting inflation and preventing a deeper economic slowdown. Given the increase in market uncertainty, implied volatility on GBP/USD options has climbed to a three-month high of 12.5%. This makes outright buying of put options more expensive. We should instead consider selling call spreads with a strike price around the 1.3450 level to capitalize on our view that the pair has limited upside.Key Levels And Positioning
Looking back, we saw a similar risk-off dynamic play out in the second half of 2025 when global growth fears surfaced. However, the added element of a direct conflict makes the current flight to the safety of the dollar more aggressive. Therefore, the historical support levels from last year might not hold as firmly this time. For the immediate future, we will be watching the 1.3280 level, which was the low from last month. A clean break below this would open the door for a test of the psychologically important 1.3200 handle. Any attempt by the pound to rally that fails to hold above 1.3350 should be viewed as an opportunity to initiate or add to short positions. Create your live VT Markets account and start trading now.
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