BoE And Fed Policy In Focus
Concerns about conflict-driven inflation reduced expectations for a Bank of England rate cut at the 19 March meeting. Money markets priced an 88% chance that the BoE will hold rates. US data showed the ADP Employment Change 4-week average at 15.5K, up from 12.8K a week earlier. Existing Home Sales rose 1.7% in February after January’s -5.9% fall. Markets priced about 40 basis points of Federal Reserve cuts by year-end, with attention on February CPI due Wednesday. A reading above 2.5% and rising oil prices could complicate prospects for rate cuts. Technically, support sits near 1.3450, then 1.3400 and 1.3360. Resistance is seen at 1.3530–1.3550, then 1.3690 and 1.3800.Looking Back To March 2025
We remember a year ago, in March 2025, when GBP/USD was pushing past 1.3450 despite serious conflict in the Middle East. The market was buoyed by a belief that the war would end quickly, a sentiment that kept risk appetite alive. This optimism proved short-lived, impacting central bank policies for the rest of the year. Those inflation fears, sparked by the conflict, became a reality as we saw WTI crude oil prices spike to over $110 a barrel by mid-2025. This forced the Bank of England to abandon any thought of rate cuts, holding its key rate steady at 5.25% throughout the entire year. As a result, the pound showed considerable strength for much of the second half of 2025. The Federal Reserve faced a similar inflationary pressure, which tempered the rate cuts many had expected in early 2025. While the US economy showed resilience, the Fed only managed a single 25-basis-point cut late in the year as energy prices began to recede. This policy caution kept the dollar relatively supported against other currencies. Now, in March 2026, the situation is reversing as the UK’s inflation has cooled significantly, with the latest CPI figure dropping to 3.1%. This data has dramatically increased market expectations for a Bank of England rate cut within the next quarter. The narrative has shifted from inflation fighting to stimulating a sluggish UK economy. Meanwhile, the most recent US CPI reading remains stubbornly high at 3.2%, and last month’s non-farm payrolls report showed a robust addition of 275,000 jobs. This persistent strength gives the Federal Reserve little reason to consider further rate cuts in the immediate future. We are now looking at a clear policy divergence between the two central banks. Given this outlook, we should consider positioning for potential GBP weakness against the USD in the coming weeks. Purchasing GBP/USD put options could be a straightforward way to speculate on a decline toward the 1.3500 level. For those looking for a more cost-effective strategy, establishing bearish put spreads would limit upfront costs while profiting from a moderate downturn. This expected policy divergence is also likely to increase currency volatility. Traders who anticipate a significant price move but are uncertain of the direction could use options straddles. This strategy would be profitable if GBP/USD makes a sharp move either up or down from its current trading range. Create your live VT Markets account and start trading now.
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