GBP/USD jumped over one percent as the US Dollar weakened due to ongoing trade tensions. The pound is on track for its third straight month of gains against the dollar, reaching multi-year highs. The Federal Reserve will soon announce its first rate decision of the year, with no changes expected. Attention is on future rate guidance. Futures markets suggest two quarter-point rate cuts may occur by the end of 2026.

Trade Tensions Impact

US President Donald Trump’s recent trade threats aimed at the EU and the UK, including issues like Greenland ownership, have not helped the dollar. European nations continue to resist his pressure. GBP has hit its highest bids in 51 months, overcoming previous technical barriers. The crucial level of 1.4000 remains a hurdle for further gains. The Pound Sterling, an essential currency for global trade, is influenced by the Bank of England’s monetary policy. Economic indicators such as GDP and employment also affect its value. A favorable trade balance supports the pound by increasing foreign demand for exports. With GBP/USD approaching the 1.4000 mark, we are seeing the highest levels in over four years, mainly due to a significant drop in the US dollar. The key event today is the Federal Reserve announcement, where guidance on rate cuts will be very important. Any hint that cuts could happen sooner than expected might strengthen this rally.

Strategies and Predictions

With strong upward momentum, we should think about buying call options to take advantage of a potential break above the 1.4000 resistance level. Fed fund futures currently indicate over a 70% chance of the first rate cut by June 2026, which continues to weaken the dollar. This suggests that the short-term outlook for GBP/USD remains positive. However, we need to be careful, as the pair has a history of sudden reversals after strong movements, similar to the decline we saw after the mid-2025 rally. It may be wise to buy some downside protection, such as put options with a strike price around 1.3800, to safeguard our long positions. This strategy would help secure recent gains if the dollar unexpectedly rises or if the 1.4000 level proves too strong. The ongoing trade discussions from the US administration also add significant unpredictability. Last year, in 2025, tariff threats caused erratic movements in the dollar index, which dropped over 3% in just one quarter. This uncertain environment makes strategies that benefit from large price swings, such as a long straddle, appealing during key events like today’s Fed meeting. While the focus is mainly on the dollar, we cannot overlook the UK side entirely, even with a light economic calendar. We must closely monitor upcoming UK inflation and wage growth data. Recent figures from late 2025 showed UK wage growth at a stubborn 4.1%. If this continues, it may compel the Bank of England to maintain its hawkish position, giving an additional boost to the Pound Sterling. Create your live VT Markets account and start trading now.

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