Fed Policy And Inflation Outlook
Fed Chair Jerome Powell said there is tension between the dual mandate goals and repeated an aim to return inflation to 2% on a “sustained basis”. He said tariff-related inflation likely added 0.5% to 1% to inflation and may be a one-time effect, while long-term expectations remain in check. In the UK, reliance on imported natural gas adds exposure to higher energy costs, alongside inflation above the Bank of England’s target. Data showed business activity at a six-month low, manufacturers’ input costs rising at the fastest pace since 1992, and retail sales falling, with Q4 2025 GDP expected to hold at 1%. On charts, resistance is seen at 1.3330, then 1.3410 and 1.3435. Support sits at 1.3188, then 1.3100 and 1.3035, with price below moving averages near 1.3500. Looking back to late 2025, we saw the Pound break down against the Dollar as Middle East tensions created a flight to safety. The move below the key 1.3500 level confirmed a bearish trend. This set a clear negative tone for GBP/USD heading into the new year. The geopolitical fears did cause oil prices to spike, with Brent crude briefly touching $92 per barrel in January 2026, though tensions have since eased. More importantly, the economic data has validated the initial weakness in Sterling. UK inflation for February 2026 remained elevated at 3.9%, well above the Bank of England’s target and constraining its policy options.Trading Strategy And Market Positioning
This environment was perfect for traders who bought put options on GBP/USD, using the uncertainty to their advantage. The slide through the 1.3200 level triggered further technical selling, benefiting those with short positions in the futures market. The initial move was driven by headlines, but the follow-through was all about weak fundamentals. Now, the divergence between the US and UK economies is the main story. The latest US jobs report showed another strong 230,000 positions added, and the Federal Reserve has signalled it will hold interest rates steady through the second quarter. In contrast, the UK’s Office for Budget Responsibility just revised its 2026 growth forecast down to 0.8%, citing weak consumer demand. For the coming weeks, we believe selling rallies in GBP/USD remains the primary strategy. Selling call option spreads with May expirations above the 1.3300 resistance level could provide income while limiting risk. The fundamental picture does not support a sustained recovery for the pound. This pattern is very similar to what we observed in 2022 when the energy crisis exposed the UK’s economic vulnerabilities. Back then, the fundamental weakness led to a multi-month downtrend that pushed GBP/USD to historic lows near 1.0300. It serves as a reminder that when central bank policies diverge this sharply, the trend can be powerful and long-lasting. Create your live VT Markets account and start trading now.
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