The British Pound is seeing a decrease in gains against the US Dollar, currently trading just above 1.3780 after peaking at 1.3868. The US Dollar is gaining some strength as traders adjust their positions ahead of the Federal Reserve’s upcoming policy decision. Recent US trade policies, increased government spending, and criticism of the Federal Reserve have weakened the US Dollar, which has fallen about 3.5% in a week. Nevertheless, the Pound is on a strong upward trend, marking three months of consistent gains against the Dollar and reaching multi-year highs.

The Federal Reserve’s Impact

The Federal Reserve is expected to keep interest rates steady, with a focus on future guidance and possible timing for rate cuts. Futures markets currently suggest two quarter-point cuts by the end of 2026. The Pound has dipped slightly against the Dollar, now trading around 1.3780 after its recent multi-year highs. This pullback appears to be a result of traders taking profits before the Federal Reserve’s announcement later today, January 28th. It’s a classic market pause after a strong rise, waiting for the next signal. The strength of the Pound is supported by UK inflation data, which remains higher than desired, at 3.2% from last month. This situation puts pressure on the Bank of England, suggesting they may keep interest rates higher for longer than their US counterparts. This difference in policy has been a key factor in the Pound’s three-month rally against the Dollar.

US Dollar’s Continuing Weakness

Conversely, the Dollar’s weakness continues, driven by worries over rising US government spending and a less aggressive Federal Reserve. We saw a similar situation in 2020, where increased spending combined with a dovish Fed led to a steady decline in the Dollar. With US inflation figures for December 2025 cooling to 2.6%, the market feels confident that the Fed can ease policy. The Fed is not expected to change rates today, but everyone is watching their guidance for the rest of 2026. According to the CME’s FedWatch tool, futures markets estimate nearly a 70% chance of at least two quarter-point cuts by year-end. Any indication from the Fed that supports this outlook could spark another round of Dollar selling. For derivative traders, this environment suggests that buying call options on GBP/USD might capture more upside while managing risk ahead of the Fed’s decision. Since the pair has pulled back from its highs, implied volatility may now be better priced than a week ago. A bull call spread could also be a smart way to reduce upfront costs, targeting a move back to recent highs near 1.3870 in the coming weeks. Create your live VT Markets account and start trading now.

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