EUR/USD reduced earlier falls on Tuesday as the US Dollar eased after the latest S&P Global PMI data. The pair traded near 1.1590, down about 0.20%, after an intraday low of 1.1567. The US Dollar Index (DXY) was near 99.30 after slipping from around 99.50. The PMI updates were the first since the escalation of the Middle East conflict and showed slower activity in both the Eurozone and the United States.

Key Pmi Highlights

In the US, the Composite PMI fell to 51.4 from 51.9 and the Services PMI dropped to 51.1 from 51.7, both at an 11-month low. Manufacturing PMI rose to 52.4 from 51.6. In the Eurozone, the Composite PMI declined to 50.5 from 51.9, a 10-month low, while Services PMI eased to 50.1 from 51.9. Manufacturing PMI increased to 51.4 from 50.8, the highest level in nearly four years. Markets have shifted rate expectations amid Middle East tensions, with the Fed now expected to hold rates through 2026. Two ECB rate rises are fully priced in, and ECB’s Martins Kazaks said rises may be needed if inflation spreads from energy. We remember seeing those PMI reports back in late 2025, which signaled trouble for both the US and Europe. The data pointed to a clear risk of stagflation, especially with the conflict in the Middle East causing energy prices to spike. This was the moment the outlook for central banks began to change dramatically.

Central Bank Divergence

The market’s forecast for central bank divergence proved correct, with the European Central Bank hiking rates twice since then, bringing its main rate to 5.00%. Meanwhile, the Federal Reserve has held firm, keeping its benchmark rate steady in the 5.25-5.50% range. This policy split has been the primary driver for the euro’s strength, pushing the EUR/USD from below 1.16 to its current level around 1.1850. Given this backdrop, options strategies that benefit from a continued, but perhaps slowing, rise in EUR/USD seem prudent. We’ve seen implied volatility in the pair increase from around 6% in mid-2025 to over 9% by January 2026, and it remains elevated. Selling out-of-the-money puts on the euro could be a way to collect premium, assuming the ECB’s hawkish stance provides a floor for the currency. Looking ahead, the key is to watch inflation data on both sides of the Atlantic. Recent Eurozone HICP inflation cooled slightly to 3.8% in February, which might make the ECB hesitant to signal more hikes. Any hint from Fed officials that they are becoming concerned about the strong dollar could also quickly reverse the trend. The interest rate differential between Europe and the US has narrowed significantly, which continues to support the euro. Traders should consider using futures to express a view on the direction of this spread itself. This allows for a more direct play on monetary policy divergence without being fully exposed to the spot currency’s daily noise. Create your live VT Markets account and start trading now.

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Sterling is down 0.2% against the US dollar and is trading near 1.34 after rebounding from mid‑March lows. Recent price moves have been contained, with the pair consolidating in a narrow band. UK PMI readings were mixed, with manufacturing slightly stronger and services slightly weaker. Both indices remain just above the neutral 50 level, indicating mild expansion.

BoE Speech In Focus

Markets are focused on a speech by Bank of England Chief Economist Huw Pill at 9:30am ET. Rate pricing has shifted, with expectations now at just over 60 bps of tightening by December. Technical measures show the daily RSI just below 50 after moving up from oversold levels. Near-term resistance is seen at 1.3450, with a short-term range between 1.3350 and 1.3450. Price action is described as having confirmed a bullish reversal and an upward trend from the 13 March lows. Geopolitical developments are a main near-term driver for the pound. We remember this time last year when the Pound was holding a range around 1.34 against the Dollar, with markets pricing in further interest rate hikes. Today, the situation has reversed, with rate cuts now being the primary focus for the Bank of England. This fundamental shift requires a completely different approach to the market.

Options Volatility And Strategy

Current UK inflation has finally cooled, with the latest CPI figure for February 2026 coming in at 2.3%, much closer to the Bank’s target. However, this has come at the cost of economic growth, which was a stagnant 0.1% in the last quarter of 2025. This weak backdrop makes it difficult for the BoE to justify holding rates at their current levels for much longer. Given the expectation of policy divergence with the US, derivative traders should consider strategies that benefit from a weaker Pound. Buying GBP/USD put options with expirations in the second quarter offers a way to position for a decline towards the 1.29 level seen late last year. This strategy allows traders to define their maximum risk while maintaining exposure to downside moves. The shift in central bank guidance has also pushed implied volatility higher in the sterling options market. One-month implied volatility on GBP/USD is now hovering near 8.5%, up from the sub-7% levels we saw for much of 2025. This suggests traders could use strategies like long straddles or strangles around key BoE meeting dates to trade the expected price swings. In contrast to the UK’s sluggish performance, recent data from the US shows more resilience, with the latest non-farm payrolls report in February 2026 adding a solid 195,000 jobs. This economic outperformance supports a stronger dollar, reinforcing the bearish case for the GBP/USD pair. This divergence is the key theme that was not present this time last year. Create your live VT Markets account and start trading now.

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Deutsche Bank said the Iran conflict could test the petrodollar system and the US Dollar’s role as the world’s reserve currency. It said changes in Middle East oil trade, sanctions, and alternative payment systems could reduce Dollar use in trade and savings over time. The bank said pressure on the petrodollar system existed before the conflict, as most Middle East oil is now sold to Asia rather than the US. It said oil from Russia and Iran has been traded outside Dollar channels due to sanctions, and that Saudi Arabia has localised defence and trialled non-dollar payment systems such as Project mBridge.

Risks To The Petrodollar Structure

It said the conflict may strain US-backed protection for Gulf infrastructure and maritime routes used for oil shipments. It added that damage to Gulf economies could lead to a sell-down of foreign asset savings. The bank noted reports that ships passing through the Strait of Hormuz may be allowed through in exchange for oil payments in yuan. It said this could support a shift from petrodollar use towards use of the yuan in oil trade. The article said it was created with an Artificial Intelligence tool and reviewed by an editor. The long-term legacy of the Iran conflict is testing the foundations of the petrodollar regime. We are watching for downstream effects on the dollar’s use in global trade and savings. This situation has the potential to fundamentally alter the dollar’s role as the world’s primary reserve currency.

Portfolio Positioning And Market Hedges

These pressures were building even before the recent escalations we saw throughout 2025. Data released for the first quarter of 2026 shows that non-dollar oil trades, primarily in yuan, now account for over 20% of global volume, a sharp increase from just 12% at the start of last year. This trend is accelerating as most Middle East oil now flows to Asia, not the US. For the coming weeks, we should consider positioning for higher currency volatility, specifically in the USD/CNY pair. Buying long-dated put options on the dollar against a basket of Asian currencies could serve as an effective hedge against this structural shift. The VIX currency index for the yuan has already climbed 5% this month, indicating the market is starting to price in these risks. The direct challenge to maritime security in the Strait of Hormuz remains a critical factor for oil prices. We should look at buying out-of-the-money call options on Brent crude futures to protect against sudden supply shocks. This strategy is prudent given the 10% price spike we witnessed during the shipping interruptions in the final quarter of 2025. A world that is becoming more self-sufficient in defense and energy will likely hold fewer USD reserves. Recent reports from February 2026 show several central banks have continued to increase their gold holdings at the expense of U.S. Treasuries for the sixth consecutive month. This suggests we should anticipate greater volatility in US interest rates, making options on Treasury futures an attractive play. Create your live VT Markets account and start trading now.

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The ECB Watchers’ Conference is set to feature Christine Lagarde, Philip Lane, Olli Rehn and Robert Holzmann discussing geopolitical risks and euro area monetary policy. The ECB is expected to reiterate that it is ready to act, but needs more time to assess risks, and that the Governing Council is in a stronger position than in 2022. March PMIs showed diverging trends in France and Germany. France’s services PMI fell to 48.3 (TDS/mkt: 49.0), signalling a faster contraction as demand weakened amid geopolitical uncertainty and pre-election caution.

France Germany PMI Divergence

Germany’s manufacturing PMI rose to 51.7 (TDS: 49.0; mkt: 49.5), the strongest production growth in over four years. This improvement was linked to increased orders tied to the Middle East conflict and stockpiling. Input costs rose in both countries, largely due to energy and materials. Firms in neither economy had yet passed these costs through to consumers. Employment conditions weakened in both France and Germany. Jobs were cut faster and hiring slowed, while business sentiment deteriorated amid uncertainty linked to the Iran conflict. The European Central Bank remains in a holding pattern, signalling it needs more time before making policy moves. This implies short-dated rate volatility (such as on Euribor options) may be overpriced in the near term, and with the deposit rate at 3.50% the market’s expectation for a summer rate cut is being tempered by this cautious messaging.

Cross Market Relative Value

The divergence between Europe’s two largest economies presents a relative value opportunity. A potential approach is positioning for German outperformance via DAX call options while pairing with CAC 40 puts, aiming to isolate French weakness from broader European beta. Rising input costs, driven by Brent back above $95 a barrel, remain a key pipeline risk that has not yet shown up in consumer inflation. The February 2026 HICP reading of 2.8% suggests inflation is still sticky, and any evidence of cost pass-through could force the ECB’s hand later this year; PPI prints are a key leading indicator to monitor. Worsening business sentiment tied to the Iran conflict argues for downside protection. Given the sharp policy pivots seen in 2022 (as a reminder when looking back from 2025), out-of-the-money Euro Stoxx 50 puts could provide a relatively cost-effective hedge against a broader risk-off move driven by geopolitical escalation. Create your live VT Markets account and start trading now.

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Bank of England Chief Economist Huw Pill said the BoE is ready to act against inflationary pressures linked to developments in the Middle East war. The remarks were included in a BoE text released on Tuesday. He said uncertainty cannot be used as a reason to delay action. He added that policy makers should set out clearly how they will pursue price stability.

Bank Of England Signals Higher For Longer

Pill said the BoE is prepared to respond if needed to limit any lasting new inflationary pressures. He also said risks to price stability are rising due to events in the Gulf. He said there is a need for caution in how monetary policy is conducted. The comments focused on delivering price stability over the medium term. Given these hawkish signals, we see the Bank of England is preparing to keep interest rates elevated to combat inflation driven by the Middle East war. Traders should anticipate that the possibility of UK rate cuts in the near future has significantly decreased. This is a direct response to rising geopolitical risk and its impact on prices. This stance is reinforced by recent events, as Brent crude oil has already climbed to nearly $98 a barrel following renewed shipping disruptions in the Strait of Hormuz. The latest UK inflation figures for February 2026 also surprised us, coming in at 2.8% when a fall to 2.4% was expected. Pill’s warning suggests the Bank sees this energy-driven price pressure as a lasting threat.

Trade Implications For Rates Fx And Risk Assets

In the coming weeks, we should consider selling SONIA futures contracts, a direct bet against the rate cuts that the market had been pricing in. Before this, the curve implied at least two 25-basis-point cuts by the end of 2026. This repricing away from cuts will likely be the dominant theme in UK rates. This policy shift should provide support for the British Pound, making long positions attractive. We can express this view by buying call options on GBP/USD, as higher-for-longer interest rates will likely strengthen the currency against its peers. The “fog of uncertainty” mentioned will also push up implied volatility on Sterling currency pairs. For equities, this is a clear headwind, as higher borrowing costs pressure company earnings. Buying put options on the FTSE 100 index would be a prudent way to hedge against a potential market downturn. We expect rate-sensitive sectors like real estate and utilities to underperform in this environment. We saw a similar pattern back in early 2025 when an unexpected surge in energy prices forced the Bank to postpone its easing cycle for two quarters. That period showed us the Bank will prioritize fighting energy-led inflation over supporting short-term growth. It appears we are seeing a repeat of that playbook now. Create your live VT Markets account and start trading now.

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USD/CAD was little changed, with the pair pushing its recent range but failing to hold above the mid‑1.37s. The Canadian Dollar stayed below an estimated fair value near 1.3402, while USD strength above the mid‑1.37 area was described as marginal and short‑lived. Oil prices and Canada’s terms of trade were cited as supporting the CAD, alongside narrower spreads. Markets were also weighing Bank of Canada tightening risks, after the BoC kept the policy rate unchanged last week and signalled a “wait and see” approach linked to the Gulf situation.

Technical Picture And Key Levels

Technical conditions for the CAD were described as largely unchanged. The mid‑1.37 zone was referenced as a resistance area, with support noted at 1.3690/00. The piece states it was produced with the help of an AI tool and reviewed by an editor. We are seeing the USD/CAD pair continue to push against resistance in the mid-1.37s, but these moves are failing to hold. Any gains above this area appear short-lived, suggesting selling interest is building. This creates a well-defined cap on the market for the near future. The Canadian dollar’s strength is being supported by fundamentals, especially with WTI crude oil prices stabilizing above $85 per barrel this month. Meanwhile, with recent data showing Canadian inflation holding at 2.8% in February, the Bank of Canada remains in a cautious “wait and see” mode. This reduces the chance of imminent rate cuts that would weaken the currency.

Trade Setup And Risk Triggers

The pair is currently trading significantly above what we estimate to be its fair value, which is closer to 1.3400. We saw a similar pattern for much of 2025, where rallies above the 1.3800 level were consistently met with selling pressure. This historical action strengthens our belief that the current resistance is significant. Given this strong ceiling, rallies toward the 1.3750-1.3800 zone should be viewed as selling opportunities. Options strategies that profit from the pair failing to break higher, such as selling call spreads with strike prices above 1.3750, would be appropriate. These positions can capitalize on the pair either falling or simply staying within its current range. Immediate support sits around the 1.3690 to 1.3700 area. A decisive break below this level could accelerate a move lower. Traders could therefore use a break of this support as a signal to initiate bearish positions, such as buying puts, targeting a move towards the 1.35s. Create your live VT Markets account and start trading now.

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AUD/USD fell sharply on Tuesday and traded near 0.6950, as risk aversion lifted demand for safe-haven assets, including the US Dollar. Geopolitical tensions in the Middle East drove sentiment. US President Donald Trump announced a five-day delay linked to a deadline involving the Strait of Hormuz, while referring to constructive discussions with Tehran. Iranian officials denied negotiations, and fresh Israeli strikes on Tehran added uncertainty.

Risk Sentiment And The Dollar

The US Dollar strengthened against major peers, while risk-sensitive currencies such as the Australian Dollar weakened. Markets reduced risk exposure as conflict concerns grew. In the US, preliminary S&P Global data were mixed. Manufacturing PMI rose to 52.4 in March from 51.6 in February, while Services PMI eased to 51.1 from 51.7. The US Composite PMI fell to 51.4, the lowest since April last year. It marked a second consecutive month of slower growth. Australian preliminary S&P Global data weakened in March, with the Composite PMI falling to 47 after eighteen months of expansion. The decline was led by a sharp drop in services activity.

Australia Data And RBA Focus

The Reserve Bank of Australia raised its policy rate to 4.10%, but the Australian Dollar remained under pressure. Attention shifts to Australia’s inflation data due on Wednesday. We are seeing a familiar pattern unfold, reminding us of the situation back in March 2025. Last year, a similar combination of geopolitical risk and a flight to safety drove the US Dollar higher, putting significant pressure on the Australian dollar. This dynamic pushed the AUD/USD pair down toward the 0.6950 level as traders unwound risk exposure. Today, with AUD/USD trading significantly lower around 0.6580, the environment is comparable, though the specific geopolitical pressures may differ. Market volatility has been ticking up, with the VIX index recently climbing from 14 to over 17, reflecting a growing unease among investors. This renewed sense of caution is once again channeling funds into the US Dollar as a primary safe-haven asset. The US economy continues to show resilience, much like the mixed but still expansionary picture we saw in 2025. The most recent S&P Global Flash US Composite PMI registered a solid 52.2, reinforcing the view that the Federal Reserve has little reason to cut rates aggressively. This relative economic strength makes holding US Dollars attractive, providing a yield advantage over other currencies. Australia’s economic footing, while not in the sharp contraction seen this time last year, is less certain. With the RBA holding its cash rate at 4.35% and inflation still persistent at 3.4%, the central bank is in a difficult position. The weakness in its key trading partner, China, continues to weigh on the Aussie’s long-term outlook, making it vulnerable during global risk-off periods. For derivative traders, this environment suggests that betting on increased price swings is a prudent strategy. Buying AUD/USD options, such as straddles or strangles, allows one to profit from a significant move in either direction without having to predict the exact outcome of geopolitical events. This is a way to trade the elevated uncertainty itself. Given the strong underlying demand for the US Dollar, bearish positions on the AUD/USD pair remain compelling. Traders could consider buying put options to capitalize on further downside while strictly defining their maximum risk. The break of the 0.6600 support level last month signals that a test of 0.6500 could be imminent if risk aversion continues. Looking ahead, the upcoming US Personal Consumption Expenditures (PCE) inflation data will be a critical driver for the US Dollar. A higher-than-expected reading would reinforce the “higher for longer” interest rate narrative and likely send the AUD/USD lower. Traders should therefore be positioned for a potential spike in volatility around that release next week. Create your live VT Markets account and start trading now.

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The Richmond Fed manufacturing index for the United States was 0 in March. Forecasts had pointed to -5. A reading of 0 indicates no overall change in manufacturing conditions in the region. The result was 5 points higher than expected.

Manufacturing Surprise Signals Resilience

The Richmond Fed manufacturing number coming in flat at 0, instead of the expected -5, is a notable sign of economic resilience. This single data point suggests the manufacturing sector may be stabilizing, challenging the narrative of a broader slowdown. We must now question if the economy is stronger than the market has been pricing in. This report adds complexity to the Federal Reserve’s path, especially with the latest February 2026 CPI data showing inflation stubbornly high at 3.1%. A stronger manufacturing sector combined with persistent inflation reduces the urgency for the Fed to consider rate cuts in the near term. Consequently, market odds for a summer rate cut, which stood near 60% last week, are likely to diminish. For those trading interest rate derivatives, this suggests a potential shift in strategy. The market may need to price out imminent rate cuts, putting upward pressure on front-end yields. This could make selling futures contracts on the Secured Overnight Financing Rate (SOFR) or buying put options on Treasury bond ETFs an attractive position over the coming weeks. In the equity markets, this unexpected economic strength could be viewed as a positive for corporate earnings, potentially providing a floor for stock indices. We might see traders lean towards selling out-of-the-money puts on the S&P 500, collecting premium on the belief that a severe downturn is less likely. This data supports the idea of continued, albeit modest, economic activity.

Volatility And Market Positioning

This news is also likely to suppress market volatility, which has already been trending lower with the VIX hovering around 14.5. Reduced fear of a recession typically dampens expected price swings. This environment could favor strategies that profit from low volatility, such as selling VIX futures or constructing iron condors on major indices. We’ve seen this pattern before when looking back at 2023 from our perspective in 2025, where the economy consistently outperformed negative expectations. During that period, markets repeatedly had to adjust to a “stronger-for-longer” reality, causing sharp repricing in both bond and equity markets. This current data point feels reminiscent of that dynamic, suggesting traders should be cautious about betting heavily on an economic slowdown. Create your live VT Markets account and start trading now.

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US private sector activity in March rose at a moderate rate, with the preliminary S&P Global Composite PMI at 51.4, down from 51.9 in February. The Manufacturing PMI increased to 52.4 from 51.6, while the Services PMI fell to 51.1 from 51.7. The survey data linked slower growth and higher inflation pressures to the war in the Middle East. It also referenced risks tied to energy prices and global supply chains.

Market Reaction And Data Clarification

After the release, the US Dollar Index continued to recover and was up 0.3% on the day at 99.45. A correction at 15:11 GMT clarified that the March Services PMI was 51.1, not 51.5. Looking back to March of 2025, we saw the early signs of a challenging period as growth started to slow while inflation was picking up. The data showed a divergence, with manufacturing improving but the larger services sector declining, creating an uncertain economic picture. This was happening as geopolitical tensions were putting upward pressure on prices. That environment of stagflationary risk kept the Federal Reserve cautious throughout 2025, forcing it to delay the rate cuts many had been expecting. The U.S. Dollar Index, which jumped to 99.45 at the time, continued to strengthen for several more months as policy remained tight. We saw this prolonged period of high rates start to weigh on both businesses and consumers. Now, the landscape has changed as we see evidence that those tight policies are taking full effect. The latest Consumer Price Index report for February 2026 showed headline inflation has cooled to 2.9%, a significant drop from its peak but still stubbornly above the Fed’s target. This progress on inflation is now being weighed against signs of a slowing labor market.

Trading Implications And Positioning

Recent data shows the economy added only 180,000 jobs last month, falling short of expectations and suggesting the economic momentum is fading. This slowdown gives the Fed a reason to consider easing policy to avoid a significant downturn. Therefore, we expect volatility to increase around future economic data releases, particularly employment and inflation figures. Traders should consider buying volatility ahead of the next FOMC meeting. Using options strategies like straddles on the SPY or QQQ ETFs could be effective, as a surprise move by the Fed in either direction will likely cause a sharp market reaction. The CBOE Volatility Index (VIX), currently trading near 14, is low by historical standards, making options relatively cheap. The U.S. dollar, which is now trading around 103.10, is facing pressure from the prospect of rate cuts. We believe derivative traders should look at bearish positions on the dollar against currencies where central banks are expected to remain on hold, like the Euro. Buying puts on the Invesco DB US Dollar Index Bullish Fund (UUP) is a straightforward way to position for a decline. Interest rate markets are now pricing in a high probability of the first rate cut happening by July 2026, with fed funds futures indicating a 75% chance. Traders should be positioned for a steepening yield curve, where long-term rates fall less than short-term rates. This can be played by using futures contracts on different parts of the curve, such as the 2-year and 10-year Treasury notes. Create your live VT Markets account and start trading now.

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GBP/JPY traded in a tight range on Tuesday with a mild downward tilt, near 212.50. Sterling weakened after UK business surveys disappointed, offsetting earlier support from softer Japanese inflation data. UK S&P Global preliminary PMI figures for March pointed to slower activity. The Composite PMI fell to 51.0 from 53.7, below the 52.8 forecast and a six-month low.

Uk Pmi Signals Softer Growth

The Services PMI dropped to 51.2 from 53.9, missing the 53.0 estimate. The Manufacturing PMI eased to 51.4 from 51.7, above the 51.1 forecast. The Bank of England kept its rate unchanged at 3.75% last week and warned the Middle East conflict could lift inflation via higher energy costs. Markets are now fully pricing in two rate rises by year-end, reversing earlier expectations for easing. In Japan, the National CPI rose 1.3% year on year in February, down from 1.5%, while core inflation excluding fresh food slowed to 1.6% from 2.0%, below the 2% target. The Bank of Japan held its policy rate at 0.75% last week and said it will keep raising rates if conditions match its forecasts. Focus next is on BoJ meeting minutes and UK CPI and PPI data due Wednesday.

Key Risks And Next Data Catalysts

Looking back at the data from March 2025, we saw a clear warning sign for the UK economy. The sharp drop in the PMI figures, particularly in the services sector, was an early signal of the economic slowdown that followed later that year. The market’s reaction then was to price in Bank of England rate hikes to fight inflation, which proved to be a difficult balancing act. Now, in March 2026, those stagflationary fears have become a reality, with UK GDP growth for the last quarter of 2025 coming in at just 0.1% while inflation remains sticky at 3.4%. This contrasts sharply with the situation in 2025, as the Bank of England now has far less room to raise rates further without tipping the economy into a recession. The market is currently pricing in a 50% chance of a rate cut by the end of this year. Meanwhile, Japan’s economic picture has shifted significantly from a year ago. Whereas core inflation dipped below target in early 2025, the latest data for February 2026 shows it holding firm at 2.6%, driven by sustained wage growth. This gives the Bank of Japan a much clearer mandate to continue its policy normalization, putting upward pressure on the yen. This growing divergence between a slowing UK and a cautiously tightening Japan suggests we should be positioned for further downside in the GBP/JPY pair. We see value in buying put options on GBP/JPY with expirations in the next three to six months to capitalize on this expected trend. The lesson from 2025 is that weak activity data eventually outweighs inflation-driven rate hike expectations. We should also closely monitor UK interest rate futures for signs that the market is beginning to more aggressively price in rate cuts. Any acceleration in that trend would be a strong signal to increase bearish positions on the pound. The rapid shift in expectations we witnessed in 2025 shows how quickly sentiment can turn once the narrative of economic weakness takes hold. Create your live VT Markets account and start trading now.

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