GBP/USD held steady around 1.3695 during the early Asian session on Monday. Analysts are examining the possible effects of Kevin Warsh potentially leading the Federal Reserve, believing he may keep interest rates high and reduce the Fed’s balance sheet, which would support the US Dollar. The ISM Manufacturing PMI report from the US is scheduled for release later today. President Donald Trump has nominated Kevin Warsh to head the US central bank, and many expect his policies to maintain elevated rates. This could strengthen the USD against the GBP.

Bank of England Interest Rates

The Bank of England is likely to keep interest rates at 3.75% during its meeting on February 5. This follows recent UK inflation and retail sales data that exceeded expectations. Most economists predict the UK central bank will hold rates steady at 3.75%, although some speculate a reduction to 3.50% could occur by March, depending on economic conditions. Overall, the expected BoE rate cuts may provide a short-term boost to the GBP against the USD. Meanwhile, markets are reacting to the possible implications of Warsh’s policies if he leads the Fed. Some analysts see his nomination as a careful and independent choice. Currently, GBP/USD is trading within a narrow range, similar to the conditions we saw throughout much of 2025. The ongoing uncertainty regarding the Federal Reserve’s policy direction reminds us of the speculation when Warsh was considered for the Fed chair, a scenario thought to strengthen the dollar. This historical context suggests that any unexpectedly hawkish statements from Fed officials could quickly boost the US dollar.

US Inflation and Interest Rates

Support for the US dollar is growing quietly, as recent data shows US core inflation holding steady at 2.6%, increasing pressure on the Fed to maintain current rates. With the latest ISM Manufacturing PMI at 50.8, the US economy appears stronger than the UK’s, supporting a cautious approach from the central bank. Traders using derivatives may see this as a signal to take positions that benefit from dollar strength, such as purchasing USD call options against the pound. On the other hand, the Bank of England faces a tougher situation ahead of its meeting this Thursday. The UK economy has been slow, with the latest quarterly GDP only showing 0.2% growth, while inflation has recently dropped to 3.1%. This weak economic environment might lead the BoE to consider rate cuts sooner than the Fed, which could exert downward pressure on the GBP/USD in the medium term. The growing divide in policy is causing implied volatility in GBP/USD to increase, with three-month volatility rising from 7.5% to 8.9% over the last quarter. Given the uncertainties surrounding both central banks, traders may adopt strategies that profit from significant price movements in either direction. A long straddle using options that expire after this week’s BoE decision could be an effective way to trade the anticipated increase in price action. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now